Financial Management Essentials. A Handbook for NGOs

Transcription

1 Financial Management Essentials A Handbook for NGOs

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3 Financial Management Essentials A Handbook for NGOs Produced by Terry Lewis for Mango (Management Accounting for Non-governmental Organisations) Chester House, George Street, Oxford OX1 2AU Phone +44 (0) Fax +44 (0) training@mango.org.uk Website: Registered charity no Registered company no Revised January 2015 These materials may be freely used and copied by development and humanitarian organisations for capacity building purposes, providing Mango and authorship are acknowledged. They may not be reproduced for commercial gain. Mango is an award-winning UK-based charity which provides financial management training, consultancy and free resources for humanitarian and development non-profit organisations.

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5 Table of contents Glossary of financial terms 1 OVERVIEW OF FINANCIAL MANAGEMENT 1 Foundations for effective NGO work 1 Two golden rules 2 So what is financial management? 4 The financial management process 5 Why is financial management important? 7 Who is responsible for financial management? 9 2 GETTING ORGANISED 15 Seven principles of financial management 15 The four building blocks of financial management 18 Tools of financial management 19 Systems design 21 Financial and management accounting 22 The Chart of Accounts 23 Cost centres 24 Cost structures 26 Financial policies and procedures 27 What is a finance manual? 29 Work planning 30 3 FINANCIAL PLANNING 33 The financial planning process 33 What is a budget? 36 Who needs budgets? 37 What makes a good budget? 37 Types of budget 38 Budget structures 41 Budgeting techniques 41 The budgeting process 43 Good practice in budgeting 45 Using a budget worksheet 47 Budget consolidation 50 Budgeting for central support costs 51 Multiple donor funded programmes 54 Summary of budgeting terminology 57 i 4 UNDERSTANDING ACCOUNTS 59 Why keep accounts? 59 Accounting methods 60 Which accounting records to keep 64 Supporting documentation 65 Bank book basics 66 Petty cash book 69 Full bookkeeping systems 70 What is a trial balance? 72 What are financial statements? 74 The income and expenditure report 75 The Balance Sheet 75 What is depreciation? 79 Accounting for shared costs 80 5 FINANCIAL REPORTS 81 Who needs financial reports? 81 What are the annual accounts? 84 Interpreting financial statements 84 Ratio analysis: quick reference formulas 88 Management reporting 89 The cashflow report 90 The budget monitoring report 91 Forecast reports 93 Analysing budget monitoring reports 93 Variance analysis techniques 95 Action planning 98 Reporting to donors 101 Presenting financial reports 103 Reporting to beneficiaries 105 Summary: Twenty questions SAFEGUARDING YOUR ASSETS 111 Managing internal risk 111 Four actions for internal control 112 Delegated authority & separation of duties 113 Cash control 119 Physical controls 120 The reconciliation process 124 Checking accounting records 126 Mango 2016

6 7 MANAGING AUDIT 129 What is an audit? 129 Internal audit 130 External audit 131 Donor (or project) audit 135 What does the auditor need? 136 Summary FRAUD AND CORRUPT PRACTICES 139 What is fraud? 139 Top tips on the warning signs of fraud 141 How to deal with fraud 143 What is corruption? 145 Bribery and the NGO sector 147 Zero tolerance approach to bribes 148 REFERENCES 155 APPENDICES Mango 2016

7 Glossary of financial terms Account Account code Accounting period Accrual Accumulated funds Acid test Allocation Apportionment Asset Audit A record of monetary transactions, either recorded in a book designed for the purpose or entered onto a computer file. A unique numerical code or short name assigned to each type of financial transaction, to separately identify them in accounting records. Also used in budgets and financial reports A specified time period for recording and reporting financial activity, eg one year, one quarter or one month. Adjustment made at the end of an accounting period to recognise expenses that have been incurred during the period but for which no invoice has yet been received. Money, or equipment, that we build up year by year as a result of not spending all our income. Often referred to as reserves. The ratio achieved by dividing Current Assets (excluding stocks) by Current Liabilities. It tells us if the organisation has sufficient funds to pay off its debts immediately. The process of sharing direct costs between two or more cost centres in the accounts in proportion to actual or estimated use. Eg where the costs of using a shared vehicle for project work are allocated according to the number of kilometres travelled. Income can also be allocated. The process of sharing indirect costs between two or more cost centres in proportion to the estimated benefit received. Eg sharing Director salary on the basis of full time equivalent staff numbers. Something we own or have a claim on others which is of value to the organisation. Examples include cash, equipment and loans to staff. See also Fixed Assets and Current Assets. A formal check on accounting records by an independent person (auditor). Mango 2016 i

8 Audit trail Authorisation Back donor Balance sheet Bank book Bank reconciliation Budget Budget holder Burn rate Capital expenditure Capital fund The ability to follow the journey of any reported transaction through an organisation s accounting systems. The process of approving transactions, normally the decision to purchase or make expenditure. Authorisation by a budget holder is a way of confirming that spending is is appropriate and in line with the budget. The original source of funds channelled through an agency (such as an international NGO) to an implementing partner. The agency must report back to the original funder to account for the use of the funds by the partner. A summary of the financial position of an organisation at a particular date, showing the assets owned by the organisation and the liabilities (or debts) owed to others. Also known as Statement of financial position. An accounting register which records receipts and payments transactions passing through a bank account. Also known as a cashbook or a cash analysis book. Can be held in a physical book format or in a computer file. The process of comparing the entries and ending cash balance in the cashbook with the bank statement for the same period, for the purpose of spotting any differences. It provides an important check on the completeness and accuracy of the cashbook entries. A best estimate of the amount of money that an organisation plans to raise and spend for a set purpose over a given period of time. The individual who holds the authority, and has the responsibility for managing, a budget for a specified activity, project, programme, department or organisation. Expressed as a percentage, the amount of a grant or budget used up so far. Also known as Grant or Budget Utilisation ratio. Expenditure on equipment, property and other fixed assets of high value which will be used to support activities over more than one accounting period. Accumulated funds and reserves held in the form of equipment and property. ii Mango 2016

9 Cashbook Cash reconciliation Cashflow Cashflow forecast Chart of accounts Core costs Cost centre Creditor Current assets Current liabilities Current ratio Debtor Depreciation Designated funds Direct cost An accounting register which records receipts and payments transactions passing through a bank or cash account. Also known as a bank book or a cash analysis book. Can be held in a physical book format or in a computer file. Comparing the physical cash count to the expected balance in the petty cash book on a particular date. The difference between cash received and cash spent in a period. A report that shows the expected timing of cash receipts and payments for the next 3-6 months (or longer). A list of all the accounts codes and cost centre codes that are used in an organisation s accounting system, with a description of each. Central support costs shared by many projects. Also known as operating overheads. A way of distinguishing between different activities or projects to define where costs are incurred or income is earned. Cost centres are closely linked to the concept of budget-holders. Anyone the organisation owes money to. Cash and other short-term assets in the process of being turned back into cash eg debtors. They can, in theory, be converted into cash within one year. Amounts owed to others (eg unpaid suppliers bills, bank overdraft) which should be paid in the next 12 months. A measure of liquidity obtained by dividing Current Assets by Current Liabilities. It tells us if the organisation is able to pay off its debts within 12 months. Anyone who owes money to the organisation. A proportion of the original cost of a fixed asset, representing the loss in value due to use, which is internally charged as an expense to the organisation. Part of the unrestricted general reserves which have been set aside for a particular purpose at the discretion of the Board. A cost which can be specifically allocated to an activity, department or project. Mango 2016 iii

10 Donation in kind Double funding Double entry bookkeeping Exceptions report External audit Financial accounting Fixed asset Fixed assets register Fraud Fund accounting Funding grid General ledger General funds Good received note (GRN) Where a grant or contribution to a project is made in the form of goods or services, rather than a cash donation. Where a project or activity has restricted funding from more than one source and which exceeds the budget needed to complete the activity. The method of recording financial transactions whereby every item is entered twice (once as a debit entry and once as a credit entry) to recognise there are always two sides or parties in every transaction a giver and a receiver. A short narrative report which highlights significant variances or areas for concern to accompany management reports. A review of the year-end financial statements carried out by a professionally qualified and legally registered auditor resulting in an opinion about whether they give a true and fair view of the financial position and associated records. The process of recording, classifying and summarising historical financial data, resulting in financial statements. An item of high value owned by the organisation for use over a long period, eg office equipment, vehicles and buildings. A schedule of an organisation s equipment and property, recording details of purchase date, value, location, etc. Intentionally lying or cheating to gain an advantage or to cause someone else to make a loss. Accounting for spending on projects according to the source of the donated funds. An internal planning tool which provides an overview of which donor fund is paying for what part of a project budget. The main accounting record where double-entry bookkeeping is used. See also Nominal ledger. Unrestricted reserves which have not been set aside for a particular use and which may be used to support any of the organisation s objectives. Supporting document which accompanies deliveries of goods, signed by the person receiving the delivery to acknowledge the goods are received undamaged and as stated on the packing note. iv Mango 2016

11 Imprest Income & expenditure account Indirect cost In-kind donation Journal entry Liabilities Liquidity Liquidity ratio Management accounting Net assets A type of cash float, set at an agreed level, which is topped up by the exact amount spent since it was last reimbursed to bring it back to its original level. Summarises income and expenditure transactions for the accounting period, adjusting for transactions that are not yet complete or took place in a different accounting period. Also known as Statement of financial performance, Profit and Loss account or Income Statement. A cost which cannot be specifically assigned to one activity, department or project, eg the fee for the annual audit. Usually shared out (apportioned) between projects on a preagreed basis. See Donation in kind. An entry in the books of account which covers a nonmonetary transaction eg for recording a donation in kind or an adjustment to correct a recording error. Amounts owed by the organisation to others, including outstanding invoices, unspent restricted grants and loans. The level of cash and assets easily convertible to cash compared to demands on the available cash, eg to pay bills. A measure of liquidity obtained by dividing debtors, cash and short-term investments by current liabilities. Providing financial information to managers for the purposes of planning, decision-making and monitoring performance. Total assets minus total liabilities, the net worth or equity of an organisation. Net book value (NBV) Cost of a fixed asset less the total cost of depreciation to date. Net current assets Nominal account Nominal ledger Funds available for conducting day-to-day operations of the organisation, defined as current assets less current liabilities. Also known as working capital. A page or container in the nominal ledger for recording every type of financial transaction likely to occur in an organisation. A complete list appears in the Chart of Accounts, each with a unique nominal code. A book or computer programme which holds details of each of the nominal accounts. Also known as the General ledger. Mango 2016 v

12 Organogram Payment voucher Petty cash book Prepayments Procurement Organisation chart showing the management and departmental structure of the organisation. An internal document completed for each payment to capture payment information and evidence of authorisation. Supporting documents are attached to it. The day-to-day listing of petty cash (ie small cash amounts) transactions. Amounts paid in advance at a particular accounting period, eg office rent paid for the next three months. The process of purchasing goods and services including requisition, supplier selection, purchase order, receiving goods and payment. Quarter / quarterly Three months of the accounting year, eg Quarter 1 (or Q1) would be 1 January to 31 March where the financial year runs from January to December. Receipts & payments account Reconciliation Reserves Restricted funds Signatories Statement of financial position Statement of financial performance Statutory audit Statutory deduction A summary of the cashbook o(r bank book) for a defined period with opening and closing cash balances. Checking mechanism which verifies the integrity of different parts of an accounting system, for example balancing the cashbook to the bank statement. The organisations savings, funds that are set aside from surpluses produced over the years. Income or reserves which have conditions attached to how used, usually with a requirement to report back to the donor. People who are authorised to sign documents on behalf of the organisation, eg bank transactions, purchase orders. Another name for the Balance Sheet. Another name for the Income and Expenditure statement. The annual external audit as required by law. Amounts which must be taken from an employee s pay before they receive it, such as income tax. Supporting document The original documents that provide evidence of a transaction, eg receipts, invoices, bank statements. vi Mango 2016

13 Transaction Trial balance Trustee Unrestricted funds Variance Virement Working advance Working capital Year-end Zero-base budgeting Any exchange of goods, services or money in return for other goods, services or money. List of (debit and credit) balances for each nominal account, used to prepare an Income & Expenditure report. A member of the governing body who shares overall responsibility for the NGO s work. Income and reserve funds which can be used to support any of the organisation s objectives as received without conditions attached. The difference between the budget and the actual amount of income or expenditure. The ability to transfer from one budget heading to another, for example if one budget line is under-spent, using the spare budget to offset an overspend on another line. A sum of money entrusted to someone to spend on behalf of the organisation, which needs to be accounted for. See Net current assets. Cut-off point for the annual financial accounting period. A method of preparing budgets which involves calculating costs for each item from scratch. Mango 2016 vii

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15 Chapter 1 1 Overview of Financial Management An Introduction to financial management in the NGO sector This chapter: Sets the context for good practice in NGOs Discusses the concept of downward accountability Defines financial management and financial control Describes the Plan-Do-Review cycle Explains why financial management is important for NGOs Describes who does what in financial management. Foundations for effective NGO work Our goal in the NGO sector is to provide development assistance to help people help themselves. It is widely accepted that NGOs are most effective when they contribute to people s own efforts to improve their lives, organisations or societies instead of taking a lead in trying to solve other people s problems. Mango

16 NGOs deliver quality work when their work is based on a sensitive and dynamic understanding of beneficiaries' realities, responds to local priorities in a way beneficiaries feel is appropriate, and is judged to be useful by beneficiaries. Keystone This is important for both short term and long term reasons, including: Our work should respect people s right to make their own decisions about their own lives. We can t tell people what to think or do. We can help them build up their confidence and abilities, to tackle their own priorities. NGOs are only one factor in people s efforts and we often do not understand local situations and priorities very well. Local situations are complicated and change unpredictably. They always involve local politics: when one social group benefits, another may lose out. People s priorities are also complicated and change. So our initial analysis may not be right, and our plans are always likely to have to change. Our work is only sustainable if it is based on local people s priorities. It is very unlikely that we can truly persuade people to feel a sense of ownership over our priorities. Funds are given to help beneficiaries, not NGOs it is not our money. We have a responsibility to make sure that it is as useful to beneficiaries as possible. Two golden rules ONE: NGOs front line staff have to maintain a good quality dialogue with the people they aim to help. The first Golden Rule requires staff to build up dialogue with all local groups of people, including the poorest and most marginalised. It requires managers to ask two key questions at each stage of the project cycle: Who is making decisions or analysing the situation? 2 Mango 2016

17 Do activities help people build up their self-confidence and ability to tackle their own priorities? NGOs can choose to make themselves accountable to the people or partners they aim to help, for example managing and reporting how their front line staff interact with local people and partners. This can empower local people, allowing them to increase their influence over what the NGOs do. This is sometimes called downward accountability. Downward accountability Accountability generally is the responsible use of power. It means that people can participate in decisions that affect them, 'have a say' in decision-making processes and complain when a decision is made poorly or has unexpected and unwelcome consequences. The Humanitarian Accountability Partnership. Accountability is a way of influencing other people s decisions. If more powerful people hold less powerful people to account, then it can oppress them. If less powerful people hold more powerful people to account, then it can empower them. This empowering accountability is known as downward accountability because the accountability flows down from more powerful people to less powerful people. It is the same process as citizens holding a powerful government to account. Interestingly, while NGOs are required to be upwardly accountable to their donors (and spend much time and effort reporting to donors), they do not have to be downwardly accountable to the communities they work with. TWO: NGOs depend on their front line staff and have to help them make good judgements and check whether they do. For instance, this could include: Providing front line staff with good quality information Helping front line staff build up their own skills, especially financial Mango

18 Reinforcing the commitment to helping people help themselves Decentralising decision-making, and encouraging flexibility Focusing project delivery on customer service Asking for feedback from beneficiaries and local partners. Underlying the Two Golden Rules is a third idea to keep in mind at all times: NGOs have to be rigorous and realistic in their proposals, plans and strategies. This means that NGOs must not claim more than they can realistically achieve. Otherwise donors (and other key stakeholders) will expect unrealistic results, and this can seriously distort work. These ideas and approaches in many ways challenge how we currently work and relate to key stakeholders and how we measure and monitor effectiveness. For some new ways of looking at NGO accountability and effectiveness, see Helping People is Difficult and other papers based on the research by Alex Jacobs, Mango s founder, on Mango s website. Both of the Golden Rules point to the importance of financial management in NGO operations. We have to be accountable and able to make good judgements. We can t do that without robust financial management systems in place. So what is financial management? Many people have the impression that financial management is just about keeping accounting records. In fact, it is an important part of programme management and must not be seen as a separate activity left to finance staff. Financial management entails planning, organising, controlling and monitoring the financial resources of an organisation to achieve objectives. 4 Mango 2016

19 Financial management to an NGO is rather like maintenance is to a vehicle. If we don t put in good quality fuel and oil and give it a regular service, the functioning of the vehicle will suffer and not run efficiently. If neglected, the vehicle will eventually break down and fail to reach its intended destination. At the heart of financial management is the concept of financial control. This describes a situation where the financial resources of an organisation are being correctly and effectively used. This will only happen if strong and relevant financial policies and procedures are put in place. Poor financial control in an organisation means that: assets will be put at risk of theft, fraud or abuse funds may not be spent in accordance with the NGO s objectives or donors wishes and the competence of managers may even be called into question. So it is better to spend some time designing good policies and procedures to help manage your NGO s money. The financial management process In practice, financial management is all about actively looking after the financial health of an organisation, not leaving things to chance. This involves: Managing scarce resources NGOs operate in a competitive environment where donor funds are increasingly scarce. We must therefore make sure that donated funds and resources are used properly, and to the best effect, to achieve the organisation s mission and objectives. Managing risk All organisations face internal and external risks which can threaten operations and even survival (eg funds being withdrawn, an office fire or a fraud). Risks must be identified and actively managed in an organised way to limit the damage they can cause. Mango

20 Managing strategically Financial management is part of management as a whole. This means managers must keep an eye on the bigger picture looking at how the whole organisation is financed in the medium and long term, not just focussing on projects and programmes. Managing by objectives Financial management involves close attention to project and organisation objectives. The financial management process mirrors the project management cycle Plan, Do, Review a continuous cycle. Figure 1.1: Plan-Do-Review Plan: Do: When an organisation starts up, it sets its objectives and planned activities. The next step is to prepare a financial plan for the costs involved in undertaking the activities and where to obtain funds. Having obtained the funds, the programme of activities is implemented to achieve the goals set out in the planning stage. Review: The actual situation is compared with the original plans. Managers can then decide if the organisation is on target to achieve its objectives within agreed time scales and budget. The learning from the review stage is then taken forward to the next planning phase, and so on. 6 Mango 2016

21 Why is financial management important? In many NGOs, financial management has a low priority, characterised by poor financial planning and monitoring systems. But NGOs operate in a rapidly changing and competitive world. If they are to survive in this challenging environment, they need to develop the confidence and skills to manage their financial resources and achieve more with their money. Good practice in financial management will: help managers make effective and efficient use of resources to achieve objectives and fulfil commitments to stakeholders help NGOs to be more accountable to donors and other stakeholders gain the respect and confidence of funding agencies, partners and beneficiaries give the advantage in competition for increasingly scarce resources help NGOs prepare themselves for long-term financial sustainability. Some very persuasive reasons for getting it right! Top ten reasons for good financial management: 1. To be accountable to the people who give us money With good financial reporting systems, it is easier to show donors and supporters that we are using their money for the purpose intended. 2. To be accountable to the communities we work with We have a moral obligation to show that funds raised in the beneficiary community s name are being used correctly. 3. To be able to produce financial statements for regulatory bodies As part of the registration process, NGOs are required to be accountable for the money they raise and spend. Mango

22 4. To minimise fraud, theft and abuse of resources Good financial management includes internal controls. When these are in place they help to stop fraud and protect the staff as well as the assets. 5. To plan for the future and become more financially secure We have to plan to make sure we have enough money to carry out our objectives now and in the future. Budgets help us plan for projects and manage cash. Financial information helps us to identify potential financial risks and the need for savings (reserves). We need financial information about where we are now and where we want to be in the future, to help identify our long-term financing needs. 6. To enable staff to make better decisions on the use of funds Complete, up-to-date and timely project monitoring reports enable project managers to plan their activities according to the budget available and take decisions to fulfil objectives. Good cashflow management enables activities to be planned, items purchased when needed and staff paid on time. 7. To achieve the objectives of the organisation Good financial management will give the management team and Board the information they need to ensure they are fulfilling the objectives of the organisation and following the strategic plan. 8. To enhance the credibility of the organisation NGOs that keep good accounts, create great budgets and produce accurate and timely financial reports, inspire confidence and trust in their stakeholders. This gives them an advantage over their competitors. 9. To strengthen fundraising efforts NGOs that present good budgets and audited financial statements with funding proposals are more likely to receive a favourable response. 10. To get better value for our money Financial information allows us to compare and assess spending plans to make sure we make efficient, effective and economic use of financial resources. 8 Mango 2016

23 Who is responsible for financial management? It is important to understand an NGO s structure and legal status to appreciate who is responsible for what in financial management. What is an NGO? The term non-governmental organisation tells us more about what it is not, rather than what it is. NGOs operate in a wide range of fields and come in all shapes and sizes. Whilst each one is unique, most share some common features. They are: values-led their prime motivation is a desire to improve the world in which we live not-for-profit but they can make surpluses to be set aside for future work an alliance of many different interests, so have many stakeholders governed by a committee of volunteers the Governing Body private autonomous organisations, independent of the State. Legal status There are a number of different ways of registering as an NGO and this will determine the organisation s legal status. Organisations are recognised either as a separate legal entity (incorporated body) or as a loose collection of individuals (un-incorporated body). Most smaller NGOs are un-incorporated. This means that trustees bear full responsibility and are held jointly and severally responsible (ie as a group and as individuals) for the affairs of the organisation. So individual Board members could be named in a legal action and have no protection in law. This is illustrated in Figure 1.2 by the arrows passing through the organisation s boundaries. When a body is incorporated, it has a separate legal identity and is recognised in law as an artificial person (demonstrated by the thick border protecting the individuals in Figure 1.3). Mango

24 In this situation, individuals serving as Board members have some protection in law. They have what is known as limited liability. This means that their financial responsibility, if things go wrong, is limited to a token amount (eg USD1.00). Figure 1.2: Unincorporated NGO Figure 1.3: Incorporated NGO Whatever the legal status, the trustees of an NGO together have a statutory duty to see that the organisation is being properly run and that funds are being spent for the purpose for which they were intended. 10 Mango 2016

25 The constitution Every NGO should have a founding document such as a constitution or memorandum and articles of association. This document describes, amongst other things: the name and registered address of the NGO the objects of the organisation and target group how it raises its funds the system of accountability ie who is the governing body, its powers and responsibilities. The governing body The governing body or Board is legally responsible and accountable for the organisation. This means that if anything goes wrong in the NGO then the law holds the members of the governing body responsible. It has many different names Council, Board of Directors, Board of Trustees, Executive or Governing Board and several functions including: responsibility for deciding on policy and strategy custodianship (or safeguarding) of the financial and other assets of the organisation appointing and supporting the Chief Executive representing the interests of stakeholders. The governing Board is often organised with a series of sub-committees eg Finance, Personnel or Project sub-committees. Governing Board members or Trustees are volunteers (ie not paid a salary) and are known variously as trustees, committee members, directors or council members. If Board members were to benefit financially from their membership of the Board, there could be a conflict of interest. Honorary officers are those who are elected or appointed to specific positions on the Board such as Chair, Treasurer and Secretary. They oversee the execution of Board decisions and often sign legal undertakings. Mango

26 The Chairperson is usually the main point of contact for the Chief Executive Officer (CEO), and usually fulfils an important public relations role for the NGO. The Treasurer s role is to oversee the finances of the organisation. In a smaller organisation the Treasurer may take on a more active role and act as bookkeeper, but where there are paid staff, the Treasurer assumes more of a supervisory role. Even if they are not supervising the accounting process and preparing reports themselves, Board members must still be sure that everything is in order. The governing Board members are ultimately responsible for the financial affairs of the organisation and they cannot escape this duty except by resigning from the governing body. Day to day responsibility As the Board is made up of volunteers who meet only a few times a year, it delegates authority for day-to-day management to the CEO, appointed by the Board to implement policy. The CEO then decides how to further delegate authority, to share out duties amongst the staff team. While it is acceptable for the governing body to delegate authority to staff members, it cannot delegate total responsibility since ultimate accountability rests with the trustees. Furthermore, authority without accountability is unhealthy the Board must set up monitoring mechanisms to make sure their instructions are being fulfilled. Figure 1.4 demonstrates how the authority for day-to-day financial management tasks is delegated down through the line management structure. At the same time, the accountability process comes back up through the structure as people report back on progress. 12 Mango 2016

27 Figure 1.4: Delegated authority D e l e g a t e d a u t h o r i t y Governing Body Chief Executive Officer Finance Manager Operations Manager A c c o u n t a b i l i t y Finance Team Project Officers A team effort In practice, everyone who works to achieve the objectives of an NGO has an important role to play in financial management. As a team, we must take every opportunity to integrate financial management into the day-to-day management of the organisation. Figure 1.5: Who is accountable? Mango

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29 Chapter 2 2 Getting Organised Getting the basics right for best practice This chapter: Shares key principles of financial management Outlines the four building blocks of financial management Describes the two branches of accounting Introduces the Chart of Accounts and cost centres Defines different types of costs Looks at the role of financial policies and procedures Explains what a finance manual is and what goes in it. Seven principles of financial management We begin this chapter on good practice frameworks and systems with a look at a series of guiding principles. Look upon each of the seven principles of financial management as a standard to assess your current practice and goals to aim for. Mango

30 Consistency Consistent use of financial policies and procedures are important for efficient operations. For example, the Chart of Accounts encourages consistent use of codes in the accounting records, budgets and reports. This assists the financial reporting process and promotes transparency (one of the best ways to hide irregularities is to change the way figures are reported). Accountability All stakeholders, including beneficiaries, have the right to know how financial and other support has been used to meet objectives. NGOs have an operational, moral and legal duty to explain their decisions and actions, and make their financial reports open to scrutiny. Accountability is the moral or legal duty, placed on an individual, group or organisation to explain how funds, equipment or authority given by a third party has been used. Transparency NGOs must be open about their work, providing information about activities and plans to all stakeholders. This includes preparing accurate, complete and timely financial reports. If an organisation is not transparent, it may give the impression they have something to hide. Viability To be financially viable, an NGO s spending must be kept in balance with money coming in, both at the operational and the strategic levels. Viability is a measure of the NGO's financial continuity and security. Trustees and managers should prepare a financing strategy to show how the NGO will meet all of its financial obligations and deliver its strategic plan. Integrity On a personal level, individuals must operate with honesty and propriety. For example, managers and Board members must lead by example in following policy and declare personal interests that might conflict with their official duties. The integrity of financial records and reports is dependent on accuracy and completeness of financial records. 16 Mango 2016

31 Stewardship Financial stewardship involves taking good care of the financial resources we are entrusted with, to make sure they are used for the purpose intended. The governing body has overall responsibility for this. In practice, managers achieve good financial stewardship through strategic planning, assessing financial risks and setting up appropriate systems and controls. Accounting standards The system for keeping financial records and documentation must observe internationally accepted accounting standards and principles. Any accountant from anywhere around the world should be able to understand an organisation s financial accounting systems. Tip: Use the 7 principles as a checklist to help identify relative strengths and weaknesses in your own organisation. To help you remember, a useful mnemonic formed by taking the first letter of each of the principles is CAT VISA. Mango

32 The four building blocks of financial management There is no model finance system which suits all NGOs. But there are four basic building blocks which must be in place to achieve good practice in financial management. Figure 2.1: The four building blocks Accounting records Every organisation must keep an accurate record of financial transactions that take place to show how funds have been used. Accounting records also provide valuable information about how the organisation is being managed and whether it is achieving its objectives. Financial planning Linked to the organisation s strategic and operational plans, the budget is the cornerstone of any financial management system and plays an important role in monitoring the use of funds. Financial monitoring Providing the organisation has set a budget and has kept and reconciled its accounting records in a clear and timely manner, it is then possible to produce financial reports for all stakeholders. Internal budget monitoring reports help managers to monitor the progress of projects and annual financial statements provide accountability to external stakeholders. 18 Mango 2016

33 Internal control A system of controls, checks and balances collectively referred to as internal controls are put in place to safeguard an organisation s assets and manage internal risk. Their purpose is to deter opportunistic theft or fraud and to detect errors and omissions in the accounting records. An effective internal control system also protects staff involved in financial tasks. Figure 2.1 shows how all of the building blocks must be in place continuously to achieve effective financial control. For example: there is very little point in keeping detailed accounting records if they are not checked for errors and omissions (part of internal control) inaccurate accounting records will result in inaccurate reports - which in turn could cause a manager to make a wrong decision. The four building blocks are covered in detail in the following chapters. They are also used as the basis for Mango s Finance Health Check a selfassessment checklist to help you build your financial management systems. See Appendix 25. Tools of financial management There are many tools, not necessarily financial, which managers can use to help achieve good practice in financial management and control. We can identify these tools under each of the four functions of financial management (as in our working definition of financial management on page 5). Planning Planning is basic to the management process and involves looking ahead to prepare as well as possible for the future. In the course of putting a plan together managers will consider several possible alternatives and make a number of choices or decisions. Planning must always precede the doing. Tools: Strategic plan, business plan, activity plan, budgets, work plans, cashflow forecast, feasibility study etc. Mango

34 Organising The resources of the organisation staff and volunteers, vehicles, property, money have to be co-ordinated to ensure implementation of the overall plan. It needs to be clear what activities and responsibilities are to be undertaken, when and by whom. Tools: Constitution, organisation charts, flow diagrams, job descriptions, Chart of Accounts, finance manual, budgets etc. Controlling A system of controls, checks and balances are essential to ensure proper application of procedures and resources during programme implementation. Tools: Budgets, delegated authority, procurement procedure, reconciliation, internal and external audit, fixed assets register, vehicle policy, insurance...etc. Monitoring This involves producing regular and timely information for managers and stakeholders for monitoring purposes. Monitoring involves comparing actual performance with plans to evaluate the effectiveness of plans, identify weaknesses early on and take corrective action if required. Tools: Evaluation reports, budget monitoring reports, cashflow reports, financial statements, project reports, donor reports, audit reports, evaluation report etc. Can you identify the common tool that links all of the four functions of financial management? 20 Mango 2016

35 Systems design Systems design is one of the organising aspects of financial management. Every NGO is different and financial systems have to be adapted to meet their needs and available resources. There are a number of considerations to take into account to find the right approach for your NGO: Structure number of staff, their functions and where they are based, operational structure (eg department, branch, function). Organograms are useful here. Activities of the organisation number and type of projects. Volume and type of financial transactions do you pay for your goods and services with cash or with suppliers accounts or both? Reporting requirements and deadlines how often and in what format do financial reports have to be produced for the different stakeholders in your organisation? Resources what financial, equipment and human resources are available to help manage the finances? All of these considerations will help to decide the most appropriate: method for keeping accounting records coding structure for transactions financial policies financial reporting routines use of administrative staff. Mango

36 Financial and management accounting For the financial management process to take place effectively, financial systems and procedures need to cover two aspects of accounting. Financial accounting This describes the systems and procedures used to keep track of financial and monetary transactions. Financial accounting is a system of recording, classifying and summarising information for various purposes. Financial accounting records can be maintained using a manual or computerised system (or a combination of both methods). The main output of financial accounting is the annual financial statements, used primarily for external accountability. The financial accounts must be accurate and up-to-date if the second area is to be undertaken effectively and with minimum effort. Management accounting Management accounting takes the data gathered by the financial accounting process, compares the results with the budget and then analyses the information for decision-making and control purposes. The management accounts are primarily for internal use and should be produced on a regular and timely basis usually monthly or quarterly depending on the needs of the organisation. The table below summarises the main differences: Financial accounting: Management accounting: Records transactions Compares results against goals Classifies transactions Determines reasons for variations Reconciles records Helps identify corrective action = Summarises transactions Provides forecasts Presents financial data Analyses information 22 Mango 2016

37 The Chart of Accounts The Chart of Accounts is probably the most important organising tool for the budgeting, accounting and reporting processes. It plays a role in all four building blocks. There are many different kinds of financial transaction taking place in an NGO. We buy a wide variety of goods and services to help achieve our objectives from rent for the office to tools for a garden project. And we receive different kinds of income grants, donations and membership fees, for instance. To make sense of all of this financial activity, it helps to sort the different types of transaction into a series of pre-determined descriptive categories or accounts. These accounts are listed in the Chart of Accounts and are typically arranged in a logical order: Income Expenditure Assets (things we own) Liabilities (things we owe). When a transaction takes place, it is recorded in the books of account and categorised according to the guidance held in the Chart of Accounts. The same categories are used in the organisation s budget and financial reports, for consistency and transparency. Each organisation s Chart of Accounts will be different. Typically, the layout will include: reference number or account code, numerical or alphabetical account name sub-groupings ( family headings ) notes on when to use the account. Mango

38 Figure 2.2: The Chart of Accounts in a finance system an example of a Chart of Accounts in Appendix 1. See Note that the categories have been sorted into sub-groups under family headings such as Administration, Personnel and Vehicle Running. The coding system follows the same logic using a sequence of numbers for the family group. Family headings are especially useful for presenting summarised information. Cost centres It is helpful to further classify financial transactions according to the budget, activity, department or donor that they belong to, so that we can then report and monitor income and expenditure by activity. We use cost centres (also known as activity or budget centres) to separately identify these transactions in the accounting records. Fund accounting It is especially important to identify donor-funded activities in the accounts so that the organisation can demonstrate to the donor how the funds have been utilised. This is known as fund accounting and requires care when setting up accounting systems to identify and separate the necessary information. If you have multiple projects, you will need to design a cost centre structure that allows you to meet donor reporting requirements. 24 Mango 2016

39 Setting up cost centres The starting point for designing your cost centre structure is the organisation chart and donor funding agreements. There is no effective limit on the number of cost centres that can be used especially if you use a computer accounting program. However, do not over-complicate the structure only include costs centres for activities that you need to report on and monitor. See the example below for the Milestone Project. How are cost centres used? Each cost centre is given a unique reference or code. When financial transactions are entered into the accounting records, not only are they categorised by the type of income or expenditure Which budget line item does this belong to? but also classified according to the fund, department or project. Which project, donor or department budget does this belong to? This means that separate financial reports can be more easily produced for each cost centre, helping managers to monitor their own area of responsibility and report to project donors. Example Milestone has three departments: Coordination (ie management, administration and governance), Metalwork Department and Building Department. The Metalwork department in turn has two separate activities with their own funding sources: the Furniture Project and the Vehicles Project. Their cost centre structure and reference codes are shown in Appendix 1 (page A2) and represented graphically in the egg chart in Figure 2.3. Mango

40 Figure 2.3: Milestone s cost centres Cost structures As well as identifying the different types of expenditure for your organisation, you also need to classify them as either Direct or Indirect costs, for budgeting and accounting purposes. Direct costs are those which are clearly related to a particular activity and can be charged directly to the relevant cost centre(s). For example, in a training project, the costs of room hire for a training event and the trainer s salary. Indirect costs are those which are of a more general nature and relate to the organisation as a whole or several activities. For example, head office rent, the audit fee and the Chief Executive s salary. These usually form the bulk of what are known as the core (or overhead or central administration) costs. We need to distinguish between these two types of cost in the accounts so that managers can properly plan, monitor and control project resources. In particular, core costs have to be shared out or apportioned between the different projects in a fair and justifiable way. There are various ways to do this, for example sharing costs according to the size of each project budget (more on this in a later chapter). 26 Mango 2016

41 Financial policies and procedures All organisations need a series of financial policies and procedures to guide operations, avoid misunderstandings and encourage consistency. What is a policy? A policy sets out principles and guidelines for a key area of activity within an organisation. It removes any questions about how important resources are used. For example, a vehicle policy will clarify who can drive the NGO s vehicles, how they are disposed of and rule on private usage by staff. Policies are usually written by senior managers and then discussed and agreed by the Board or management team. Once approved, a policy is binding on everyone in the organisation and failure to do so could result in disciplinary action. A good policy is one that: is fair and realistic covers all situations likely to arise meets legal requirements is affordable for the organisation. What are procedures? Procedures describe the steps for carrying out the guidelines in a policy. They often include a requirement to complete standard forms to gather data and authorisation for actions. For example, the vehicles procedure might require completion of vehicle requisition forms and journey logsheets. Policies and procedures are not about being overly bureaucratic. They help to run the organisation smoothly and promote consistency, accountability and transparency. They also facilitate the decentralisation process and help managers make the right decisions Mango

42 Developing financial policies It is important to have a structured approach to developing financial policies, to make sure that the policy is fair, realistic and acceptable to those that will be affected. Here is a suggested approach: Decide who will be involved in drawing up the policy People are more likely to adhere to policies if they had a say in making them. If the policy is to have an impact on how programmes are delivered, it makes sense to include programme staff in the discussions. Gather information needed to develop the policy For example, if you were setting a policy on health-care support for staff, ask around other NGOs to see what they offer and what it costs. Write the policy document Use the following headings as a guide: o The purpose of the policy o Why we need the policy o Who the policy applies to o The policy guidelines o References (eg to other policies and procedures). Circulate the draft policy for feedback It is this stage that will check if the policy is fair and realistic and whether it is likely to be supported (and therefore used). Review the policy after implementation After a few months of use, go back and test that the policy is fit for purpose. Policies should stand the test of time whilst it is important to be flexible and adapt to changing circumstances, do not change policies too often. 28 Mango 2016

43 What is a finance manual? The Finance Manual brings the financial policies and procedures all together in one document. The manual may also be known as the Financial Regulations or Finance and Office Procedures. It is generally used by the finance team for day-to-day operations but also serves as a reference in case of query by programmes staff. Be aware of the limitations of a finance manual: it is a major undertaking and it cannot cover everything, to do so would be too bureaucratic. It must be a living manual, used and implemented by everyone and regularly reviewed and updated. A finance manual might include sections on: o Financial accounting routines o The chart of accounts and cost centre codes o Delegated authority rules (ie who can do what) o The budget planning and management process o Procurement procedures o Bank and cash handling procedures o Financial reporting routines and deadlines o Management and control of fixed assets o Staff benefits and allowances o Annual audit arrangements o How to deal with fraud and other irregularities o Code of conduct for staff and Board members. The manual may also include some reference materials such as: o Organisation chart o Job descriptions o Standard forms. Mango

44 Standard forms Standard forms are purpose-designed documents used to simplify or facilitate financial administration routines (see Appendices for some commonly used standard forms). They help people to follow and administer the procedures and gather information and signatures. Examples of standard forms Supplies requisition Payment voucher Petty cash voucher Purchase order Advance request Travel & subsistence expenses claim Assets register Vehicle log sheet Bank reconciliation form Journal voucher Work planning Financial management involves many different tasks and routines. It is therefore important to plan tasks involved during the financial year, such as: Financial accounting routines eg month-end and quarter-end reconciliation, payment runs Critical deadlines eg payment of government taxes, insurance renewals Reporting schedules especially to meet donors reporting requirements 30 Mango 2016

45 Budgeting process drafting, checking and approving Annual reviews eg assets register, finance manual, insurance cover Year end procedures eg closing accounts and annual external audit. One of the best ways to do this is to create a yearly planning chart and put this up in your office and encourage everyone to keep it up to date. This helps to schedule tasks and allocate tasks to staff so that deadlines can be met. See Appendix 17 for an example. Mango

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47 Chapter 3 3 Financial Planning Failing to plan is planning to fail. (Chinese proverb) This chapter: Looks at the link between strategic and financial planning Highlights different types of budgets Describes different approaches to budgeting Looks at good practice in budgeting Explains how to create an activity-based budget Describes the process of budget consolidation Introduces a tool for managing multiple-donor funding. The financial planning process Financial planning is both a strategic and operational process linked to the achievement of objectives. It involves building longer term funding strategies and shorter-term budgets and forecasts. It lies at the heart of effective financial management. Financial planning starts with a clear plan about you want to do and how you intend to do it. We can only produce effective budgets if we have good plans to base them on. Mango

48 If you don t know where you are going then you are sure to end up somewhere else. Mark Twain The planning pyramid NGOs exist to achieve certain objectives. It is usual to lay down how the objectives are going to be achieved in a strategic plan. The strategic planning document has several component parts starting with an outline of long term goals either or both a Vision and Mission and going into greater and greater detail about how the mission is to be achieved. Figure 3.1: The planning pyramid As the level of detail increases, the timeframe becomes shorter and participation of staff members in the planning process should increase. Vision The vision represents the very long-term goal of the organisation it is the big problem which the NGO alone cannot solve but strives towards. For example, the United Nations underlying vision is world peace. 34 Mango 2016

49 Mission Most NGOs have a mission statement. It clarifies the purpose and values of the organisation in a few, general, sentences. Objectives Objectives are the building bricks which help an organisation achieve its mission. Objectives (also known as goals or strategic objectives) give focus to the organisation s work and state in clear terms what it is that the organisation hopes to achieve over a given timeframe. Strategies Strategies (also known as specific objectives) set out how the organisation will achieve each of its core objectives. They outline the actions which will be taken for each objective. Activity plans The strategy may be sub-divided into several, more specific and detailed plans for each activity, function or project. Activity plans have a shorter time focus (about one year) than strategies and objectives and are subject to regular review as progress is made. Activity plans are the basis for budgets so must be very SMART specific, measurable, achievable, relevant (or realistic) and time-bound Once plans are set, the organisation draws up its budgets and cashflow forecast to help implement the plans. During the year financial reports are produced to compare the budget with actual performance. This review stage is very important to the financial planning process since it will highlight areas where the plans did not happen as expected. This learning process will help to identify revisions which need to be made to the plans. And so the cycle continues... Plan, Do, Review. Mango

50 What is a budget? A budget describes an amount of money that an organisation plans to raise and spend for a set purpose over a given period of time. A budget has several different functions and is important at every stage of a project: Planning A budget is necessary for planning a new project, so that managers can build up an accurate idea of the project s cost. This allows them to work out if they have the money to complete the project and if they are making the best use of the funds they have available. Fundraising The budget is a critical part of any negotiation with donors. The budget sets out in detail what the NGO will do with a grant, including what the money will be spent on, and what results will be achieved. Project implementation An accurate budget is needed to control the project, once it has been started. The most important tool for on-going monitoring is comparing the actual costs against the budgeted costs. Without an accurate budget, this is impossible. Because plans sometimes change, it may be necessary to review the budget after a project has started. Monitoring and evaluation The budget is used as a tool for evaluating the success of the project, when it is finished. It helps to answer the question: Did the project achieve what it set out to achieve? A budget tells your money where to go, otherwise you wonder where it went. J. Edgar Hoover 36 Mango 2016

51 Who needs budgets? Budgets are used by different people for different purposes: The Board of Trustees needs the NGO s overall budget because it has to formally approve it and monitor its progress. Chief Executives need budgets to keep an eye on progress of programmes, operational costs and funding. Fundraisers need budgets to accompany funding applications. Project managers need budgets to oversee the implementation of their project activities. Finance staff need budgets to make sure there are enough funds in the bank to cover anticipated expenditure. Donors need budgets so they can see how an organisation intends to spend its grants. Community partners need budgets so they can see how an NGO plans to spend and raise funds for their community projects. What makes a good budget? The sign of a good budget is that anyone could pick it up and use it to fulfil their budget management responsibilities. How good are your budgets? Fit for purpose? o Have the right level of detail for the user o Include all relevant income and expenditure items o Costs are justified and accurate. Easy to use? o Calculations are clear o Include explanatory notes where needed. Mango

52 Types of budget Essentially, there are three main types of budget: o Income & Expenditure budget o Capital budget o Cashflow forecast. Income & Expenditure budget The Income & Expenditure budget sets out the anticipated running costs (also referred to as recurrent costs) of the organisation and shows where the funds will come from to cover the costs. See Appendix 11 for a Consolidated Income & Expenditure budget. The annual Income & Expenditure budget is often broken down into shorter periods (or phases ) quarterly or monthly to assist with monitoring progress. Capital budget A capital budget lists the expenditure you intend to make for the coming years on capital projects and oneoff items of equipment that will form part of the organisation s fixed assets. As these usually involve major expenditure and non-recurrent costs, it is better to list and monitor them separately. Examples of capital expenditure include: o Vehicles o Office furniture and equipment o Computer equipment o Building construction or purchase o Major renovation works. A separate capital budget is not required if only one or two capital items are to be purchased. In this case it is sufficient to incorporate the capital items in a separate section of the Income & Expenditure budget. This is most common in a project budget. The implications for the Income & Expenditure budget should be noted such as running costs for vehicles. 38 Mango 2016

53 Cashflow forecast For good financial management, cash reserves are essential as there will always be times when grants are delayed or unexpected expenses occur. The cashflow forecast (or cash budget) helps managers identify those times when cash levels become critical. Whereas the Income & Expenditure budget shows whether the organisation is covering its costs over the whole year, the cashflow forecast shows whether it has sufficient cash in the bank to meet all of its obligations needs as they arise. (See Appendix 13 for an example.) It predicts the flow of cash in and out of the organisation throughout the year by breaking down the master (or overall) budget into smaller time periods, usually one month. This helps to identify likely cash shortages and allows avoiding action to be taken such as: requesting donor grants early delaying payment of certain invoices delaying some activities negotiating a temporary loan facility at your bank. However, take care as there are likely to be negative consequences if you follow the last three strategies: delaying payments could affect your relationship with suppliers delaying activities will affect the communities you work with and your ability to implement the programme as agreed with your donor borrowing money from the bank will attract interest and bank charges. The cashflow forecast is also useful where the organisation maintains substantial cash reserves which need to be invested wisely to maximise investment income. See below for tips on creating cashflow forecasts. Mango

54 Tips for preparing a cashflow forecast Set up a cashflow forecast table (a computer spreadsheet will make this easier) with budget items listed on the left and the months of the year along the top (see Appendix 13). Have ready the organisation s activity plans, income schedules and budgets for the year. Based on the income schedule, work out when you will receive cash in the bank for each income item. Plot each expected cash receipt in the cashflow table. Based on the activity plans for the year, work out when cash will actually leave the bank for each expenditure item. For unpredictable expenses eg equipment repairs use a monthly or quarterly estimate. Plot each payment in the cashflow table. Take account of payment terms and income schedules. Eg office rent is usually paid in advance, so the rent for April to June would be paid in March. Similarly, a donor s grant agreement might specify 50% of the grant will be paid at the start, then 20 % in months 6 and 9 and the final 10% after receipt of the final report in month 12. You do not need to include non-cash transactions, such gifts in kind and depreciation, in the cashflow forecast. This is because these are paper transactions only there is no actual cash movement. Once the budget has been broken down according to expected cash flow activity, you can calculate the net cash flow from the monthly totals on cash in and cash out. This tells you whether there is more cash coming in or going out for each month. Include an estimate of any cash in the bank at the start of the year and add this to the net cash flow to give your monthly cash forecast. When your forecast is complete, you will be able to spot any problem months. For example, in Appendix 13, the figures in brackets on the bottom line indicate that Milestone is predicting cash shortages in several months of the year. This signals that they need an action plan to avoid the cash shortages. 40 Mango 2016

55 Budget structures It is practical to organise budgets at different levels, eg by department, programme or cost centre. This allows budgets to be delegated and monitored at the activity level, and summarised overall. Figure 3.2 shows Milestone s budget hierarchy which reflects their cost centre structure. The lower level project budgets are consolidated into the departmental budget. Departmental budgets are in turn consolidated into one master budget (as in Appendix 11). Figure 3.2: Milestone s budget structure Milestone Master Budget Building Dept Budget Metalwork Dept Budget Coordination Dept Budget Furniture project Budget Vehicles project Budget Budgeting techniques There are two main ways to build a budget incremental and zero-base. You should adopt the approach which works best for you, given the skills and time available. Incremental budgeting This approach bases any year s budget on the previous year s actual, or sometimes budgeted, figures with an allowance for inflation and known changes in activity levels. It has the advantage of being fairly simple and quick to implement. Mango

56 It is most useful for organisations where activity and resource levels change little from year to year. A frequent criticism of this approach is that it does not encourage fresh thinking and perpetuates existing flaws. It is also difficult to justify these figures to donors since the original calculations are long forgotten. Zero-based budgeting An alternative approach is to start with a clean sheet or a zero base. Zerobase budgeting (or ZBB) ignores previous budgets and starts with next year s targets and activities. ZBB requires the writer of the budget to justify all the resource requirements. This process may suit organisations going through a period of rapid change and those, like NGOs, whose income is activity-based. Zero-based budgets are said to be more accurate since they are based on the detail of planned activities. However, the approach does require more work and time than incremental budgeting. Activity-based budgeting This is a special form of Zero-base budgeting and is frequently used in the NGO sector to create project budgets. It is favoured by many donors. See Appendix 12 for an example. Figure 3.3: Top down or bottom up Top down Long-term objectives Annual Budget Day-to-day activities Bottom up 42 Mango 2016

57 Top down or bottom up? Where operations staff are involved in setting their budgets it is described as bottom up budgeting as opposed to top down where budgets are set by senior managers. Since a budget is a financial plan that relates directly to the activities of the organisation, it is important to involve those who will be responsible for project implementation in writing the budget. If this is not done, the budget could be less accurate and staff less likely to appreciate the need to spend within budget or to reach fund-raising targets. The budgeting process It is best to approach the budgeting process as an organised and structured group exercise. The budget process involves asking a number of questions: What are the objectives of the project? What activities will be involved in achieving these objectives? What resources will be needed to perform these activities? What will these resources cost? Where will the funds come from? Is the result realistic? The budgeting process is one we go through almost on a daily basis without even realising, as the example outlined below demonstrates. As you read it through, think about what Rudi and his mum learnt about the process: Talking through an activity helps to identify the resources we need Breaking down quantities helps to accurately estimate costs Include contingencies for unforeseen events or price changes. We will return to the process when we look in more details at the Activitybased Budgeting approach. Mango

58 Budgeting example: Rudi goes to a football match It is Friday afternoon and a teenage son Rudi rushes in from school and asks his mother for $10.00 as he d like to go out with some friends for the evening. His mother asks him to explain what he will be doing and why he needs $ He says he will take the bus into town, go for some food and then go to watch a football match. His mother then took him through the budgeting process, as follows: Objective: To have an entertaining evening with friends. Activities: Bus journey to town, visit a cafe, watch the football match, bus journey home. Resources: Money to cover the costs of bus fares, food and ticket. $ Bus fares x 75c Food & drink 3.00 Burger and a soda Tickets 3.00 Standing area Sweets 0.50 To buy at the match TOTAL 8.00 Rudi s mother decides that the plan is a reasonable one but gives him $8.00, not the $10.00 he originally asked for. The next day... On Saturday morning, Rudi s mother asks how he enjoyed the evening. He reports that the match was great, his team won and that he and his friends had a very entertaining evening even though it did not go entirely according to plan After going to the cafe, Rudi and his friends arrived at the football stadium to find that all the $3.00 tickets were sold out and they had to spend an extra $1.00 each for a more expensive area. This meant that Rudi did not have enough money left to buy sweets or to get the bus back home again. Fortunately, he met the parents of some school friends at the match and they offered to give him a lift home, which he gratefully accepted. So it all ended well, even though his plans did not go exactly as intended. 44 Mango 2016

59 Good practice in budgeting Clarity Since many different people will need to use the budget for different purposes, they should be able to understand it (and adapt it, when necessary) without any additional explanation beyond what is written down. So keep notes on budgeting assumptions and calculations. Get organised There are several stages involved in constructing a budget before it can be submitted for approval to the governing body, so it is a good idea to prepare a budgeting timetable and commence the process early. This could be up to six months before the start of the financial year, depending on the size of the organisation and what approach has been adopted. Budget headings When setting a budget for the first time or when reviewing a budget, it is important to pay attention to the Chart of Accounts. This is because the budget line items also appear in the books of account and on management reports. If the budget items and accounting records are not consistent then it will be very difficult to produce monitoring reports once the project implementation stage is reached. One way of achieving consistency is to design a Budget Preparation Sheet for your organisation, which will act as a memory-jogger and prompt staff to include all relevant costs. It will list all of the main types of income and expenditure that a project or department might have in a typical year. Estimating costs It is important to be able to justify calculations when estimating costs. Even if you use the incremental method of budgeting, do not be tempted to simply take last year s budget and add a percentage amount on top for inflation. While last year s budget could be very helpful as a starting point, it could also be very misleading and contain historical inaccuracies. One of the best approaches is to use a budget worksheet (see Appendix 12) to list of all the inputs required and then specify the number and unit cost of each item. Mango

60 From this detailed working sheet, it is then a simple matter to produce a summarised budget for each line item. It is also easy to then update if quantities or unit costs change. See below for detailed guidance on how to use a budget worksheet. Contingencies Contingencies are items included in a budget for unforeseen expenses. It is best to include these for the budget lines that might need a cushion (eg salaries, insurance and fuel) rather than adding a bottom line percentage. Every item in your budget must be justifiable adding a percentage on the bottom is difficult to justify and difficult to monitor. Forgotten costs There is a tendency in the NGO world to under-estimate the true costs of running a project for fear of not getting the project funded. Here are some of the most often overlooked costs: o Start-up costs (eg publicity, legal costs) o Central support ( core )costs (eg insurance, utilities) o Staff related costs (eg recruitment, training, benefits and taxes) o Vehicle running costs o Equipment maintenance and repairs (eg for photocopiers and computers) o Governance costs (eg Board meetings, AGM) o Audit fees. Check the figures Find yourself a budget buddy to check your draft budget with a critical eye. This could be a work colleague or someone doing a similar role in another NGO. Ask them to check the figures for accuracy, that you have included all of the resources needed for the activity and if the total cost looks reasonable. 46 Mango 2016

61 Using a budget worksheet Table 3.1 shows a typical layout for a budget worksheet as used in activitybased and zero-based budgeting. The extract describes the inputs needed for a 4-day workshop for 20 participants with two tutors. The table details items required for the workshop, the quantities required and the cost per unit. The final column provides the budget for each item. Other typical columns (not shown in the example above due to space limitations) include Notes and Accounts Codes, as described in Table 3.2. Table 3.1: Budget worksheet A B C D E F G [D x E x F] Ref. Description Unit No. No. Unit Total type units times cost $ cost $ 1 Workshop costs 1.1 Room hire for workshop Days Tutors fees Days Tutors accommodation Nights Lunch & refreshments Person Course handbooks Person Folders for papers Trainee Sub total 2,010 Unit Types Deciding on the unit type requires some careful thought as it is not always obvious. The best way to work it out is to ask yourself: how will the supplier charge for this item? So, for example, a hotel charges for a room for each night, so in this case the unit type is night and the unit cost would be the cost for one night. To arrive at the budget, we would specify the number of rooms or the number of nights or both. The checklist in Table 3.3 will help you select a unit type. Mango

62 Table 3.2: Budget worksheet columns A Ref. Line reference useful if you are discussing the budget and need to draw attention to a particular line in the worksheet. The budget is often separated into sections for specific activities, each with a number. In the above example all workshop related costs are listed under section 1. B Description A short description of each line in the budget. Try to include different inputs on a line of their own rather than lump similar costs all together. C Unit type D No. units E No. times or frequency F Unit cost G Total cost H Notes This is the basis for costing and calculations. The unit type will vary according to the budget item. For example, in line 1.4 of the table above, the budget for lunches is worked out on a per person basis. See below for some further examples of unit types to use for different budget items This specifies the number of units required for the project. For example, in the budget above on line 1.4, we need lunches for 22 people (20 trainees plus 2 facilitators). This is useful where we need the item described more than once. For example, in line 1.4 in the table above, we need to provide lunches for 22 people on 4 days as it is a 4-day course. In line 1.3, we need to provide 5 nights accommodation for 2 tutors. Whereas in line 1.1 we only need to hire a one room. That is, what does each unit cost as defined in column C? So, in line 1.4 we see that it costs $5.00 for lunch and refreshments for each person. This is calculated by multiplying no. units x quantity x unit cost. So, the cost of lunch and refreshments for 22 people on each of 4 days at $5.00 per person costs $ [22 x 4 x 5] A notes or comments column is useful to clarify what the item is for and how quantities have been arrived at. I Accounts Code The code used in the organisation s accounting records (ie as listed in the Chart of Accounts) J Donor code It is very useful to add another column which details the donor code or line item reference as this makes it easy to transfer the budget figures into the donor budget and reporting formats. 48 Mango 2016

63 Table 3.3: Choosing unit types Typical budget items: Examples of unit type: Personnel Costs Salaries, benefits & taxes Month Staff recruitment Advert entry Staff development Days, person Subsistence allowances Days, person, trip Volunteers expenses Session, person, trip Transport costs Fuel & lubricants Kilometre, month Vehicle insurance Month or lump sum per quotation Vehicle maintenance Kilometre, month Air fares Trip/journey Bus/taxi fares Trip, month Distribution costs Kilometre, trip, month Programme administration Office rent, electricity and water Month Office insurance Month or lump sum per quotation Telephone & fax, postage Month Office stationery Box, carton, piece or month Internet subscription Month or lump sum per quotation Repairs & renewals Month Bank charges Month Audit fees Lump sum per quotation Project Costs Room hire/accommodation Day Publicity costs Advert entry, lump sum per quotation Publications/reference books Month or lump sum per quotation Training materials Trainee, lump sum per quotation Professional fees (eg, consultant) Days, lump sum per quotation Printing/photocopy Copy, person, lump sum per quotation Inputs (eg pipes, tents, tools) Piece Equipment Piece, or lump sum per quotation Food Person, meal, day Mango

64 The codes columns on the budget worksheet It is a good idea to include internal accounting codes, and even donor codes, for each item on your activity-based budget worksheet. We can then summarise the budget details into any format required, eg project budgets for internal use or different donor budget to accompany a funding proposal. The internal codes are detailed on the Chart of Accounts and the donor codes will be found on the donor s budget format or grant guidelines. See the example in Appendix 13 which includes Milestone internal accounts code in the final column. The codes also help with the process of budget consolidation ie joining together several cost centre budgets into one overall budget. Budget consolidation The diagram in Figure 3.4 demonstrates the process of consolidating budgets into different levels or formats. It shows how budget worksheets are the starting point for all other budgets. They can be summarised into project budgets based on the Chart of Accounts codes. This format allows us to compare the budgets against actual income and expenditure later on. The project budgets can in turn be further summarised into consolidated or master budgets to show information for a programme, department or for the whole organisation. These are ideal for managers and the Board. The internal summarised budgets are then used to create cashflow forecasts. The budget worksheets can also be used to re-draft the budget into different donor budget formats. 50 Mango 2016

65 Figure 3.4: Consolidating budgets Budgeting for central support costs Budgeting is not just about looking at the cost of programme activities. When we create project budgets we must include both the direct project costs and a contribution to the central support (or core ) costs to arrive at the true cost of running the project. The starting point is to write a budget for the central support costs so they do not get overlooked and the costs are clear. Typically, central support costs include indirect costs such as: o Office rent, insurance and utilities o Core staff salaries CEO, accountant, receptionist o Non-project vehicles and their running costs o Office stationery and consumables o Audit fees. Mango

66 Is it always a central support cost? It is important to keep central support costs to a minimum not only are these costs difficult to finance, they are closely scrutinised by donors, regulatory bodies and the general public. In some cases, it is possible to allocate out some shared costs to project budgets to reduce the central charge. For example: Pool vehicle shared by the CEO and programme staff: only the CEO usage counts as Central Support costs. Programme staff usage should be included as direct project costs in the relevant project budget. Photocopier: charge projects directly for their usage to cover the costs of paper and machine rental. In both of these cases, you need to set up a usage log to support the charge. Financing central support cost Every organisation needs a clearly stated policy on how it will pay for its central support costs. These costs have to be financed just like any other cost incurred in an NGO. There are essentially two ways or a combination of both to finance your central support costs: Use unrestricted funds (ie money given to the organisation for general purposes) Charge projects a pre-arranged percentage of the costs. The Figure 3.5 shows how this works in practice, using Milestone as an example. Unrestricted funds come in centrally ( Coordination ) and are used to help pay for some of the central support costs. The balance is financed by including a contribution to central support in the project budgets, using an agreed apportionment criteria. (The methods which can be used to apportion costs are covered in a later chapter.) The projects will then pay their contribution to core costs from their project funds. Note however, that as these are restricted funds, the donors rules and budgets must be checked to see what is allowed. 52 Mango 2016

67 As a general principle, you should never accept project funding without a plan to cover the cost of central support it is just not possible to run a project with direct costs only! Figure 3.5: Financing Milestone s core costs Mango

68 Multiple donor funded programmes When a programme or project has more than one donor, it can present a number of financial planning problems. In particular, Donors have different budget formats and layouts, which they require you to use when applying for funds. Budget line items and descriptions vary, so it is not clear exactly what each category includes or excludes, eg Transportation, Travel, Vehicle Running. It is not always clear who is paying for what activity or item. Different donors have different policies on central support costs. It is not always clear if all the project s internal contribution is covered. Sometimes double funding (ie too much money) occurs on some budget lines and other items are under-funded. Some solutions A detailed Chart of Accounts If the Chart of Accounts is detailed enough, it will be able to cope with different donor budget lines. For example, the category Transportation is extended in the Chart of Accounts to include: o Fuel & oil o Vehicle maintenance o Vehicle insurance o Public transport o Air travel o Distribution costs. Create budget worksheets for all projects Because this approach provides a very detailed budget, with donor and internal codes applied to each line, it is possible to transfer the information to any other budget format as required. The worksheet format provides maximum flexibility. 54 Mango 2016

69 Include some indirect costs as direct project costs Look to see if it is possible to classify any central support costs as direct costs in the project budget. For example, contributions to office rent and insurance, accounting costs and audit fees. But do take care as all costs must be justifiable. Prepare a funding grid A funding grid is an internal planning tool which provides an overview of which donor fund is paying for what part of a budget. It is also useful for renegotiating funding agreements and identifying fundraising needs. How it works: The overall project or programme budget is detailed in column 1. Donor budgets are entered in the next columns and reconciled to the overall project or programme budget. Unrestricted funds are then entered to plug any gaps. The final column identifies any double funding (surplus) and remaining funding gaps (deficit). The funding grid must be updated regularly as new information becomes available. Table 3.4: Example funding grid Milestone Project (extract) All figures in USD Confirmed Funding RESTRICTED UNREST D Budget Total DFID Smile Vanguard Dona- Total Surplus/ item Budget Trust tions expected (deficit) Admin. 38,100 9,000 9, ,200 31,200 (6,900) Staff 71,000 18,000 18,000 9,000 26,000 71,000 0 Travel 51,000 11,000 11,000 2,000 6,500 30,500 (20,500) Training 111,200 52,000 52,000 10, ,000 2,800 TOTAL 271,300 90,000 90,000 21,000 45, ,700 (24,600) Mango

70 In the example, we can see that: there are some predicted funding gaps for the Admin and Travel budget lines (indicated by the negative figures in brackets); a predicted surplus of funds on the Training budget line of USD 2,800 (indicated by the positive figure); and overall, Milestone appears to be USD 24,600 short of the funds it needs. However, Milestone must not assume that it can keep the extra USD 2,800 on the Training line and use it elsewhere in the budget: these funds are restricted and strictly speaking this presents a double funding situation. In this case, Milestone must contact the donor(s) and make a request to reallocate the surplus funds on the Training line to other budget lines where there are funding gaps. If the donors refuse, the surplus restricted funds must be given back to the donor. 56 Mango 2016

71 Summary of budgeting terminology Budget type or status Definition MAIN TYPES OF BUDGET Income & expenditure Capital Cashflow forecast This budget lists all items of incoming funds and recurrent (ie regularly occurring) costs for a specified period. This budget lists one-off expenditure for expensive items such as equipment, property, vehicles, or major building works, which will be used over several years. Shows the predicted flow of cash coming in and out of the organisation each month, with the purposes of identifying periods of cash shortages or surpluses. BUDGET STATUS Balanced Deficit Surplus Where anticipated income is the same as anticipated expenditure Where anticipated income is less than anticipated expenditure Where anticipated income is more than anticipated expenditure APPROACHES TO WRITING A LEVEL OF BUDGET DETAIL BUDGET Incremental Where the calculations are based on previous year s budgeted or actual figures, with adjustments for new activities or known changes Zero-base Where the budget is built from scratch, and not based on previous budgets or figures. Activity based Where the budget is built up from a detailed activity plan (a form of zero-base budgeting). Master Shows overall anticipated income and expenditure for the whole organisation for the year. Consolidated This brings together several project or programme budgets in a table to show a summary of each and the total overall. Project or Shows income and expenditure for a specified project or programme programme for the implementation period. Mango

72 Budget type or status Definition TIME PERIODS Multi-year Phased This budget outlines anticipated income and expenditure, or cashflow, for two or more successive years. A budget broken down into time periods usually monthly or quarterly to reflect the budget requirements according to planned activity for those periods of time. Donor A budget in the format required by a funding agency, usually accompanies a funding proposal. SPECIALISED BUDGETS Flexible (or This budget is regularly reviewed and updated to take variable) account of changes in levels of activity Funding grid A special budget which reconciles anticipated income sources to the programme budget, to show which funding source is funding what, and to identify funding gaps. Rolling A budget that always covers a fixed period of time (eg 12 months). It is updated every month or quarter to include figures for the fixed budgeting period. 58 Mango 2016

73 Chapter 4 4 Understanding Accounts An Introduction to the mysteries of accounting This chapter: Discusses why an NGO needs to keep accounts Describes the different methods used to keep track of financial transactions Outlines which accounting records to keep Defines and explains key financial accounting concepts and terminology. Describes the financial statements which are prepared from the accounts. Why keep accounts? Good financial records are the basis for sound financial management of your organisation. Information All organisations need to keep records of their financial transactions so that they can access information about their financial position, including: Mango

74 A summary of income and expenditure and how these are allocated under various categories. The outcome of all operations surplus or deficit, net income or net expenditure. Assets and liabilities or what the organisation owns and owes to others. Credibility NGOs especially need to be seen to be scrupulous in their handling of money keeping accurate financial records promotes integrity, accountability and transparency. Legal requirement There is often a statutory obligation to keep and publish accounts. Donor agencies almost always require audited accounts as a condition of grant aid. Future planning Although financial accounting information is historical (ie happened in the past), it will help managers to plan for the future and understand more about the operations of the NGO. With information spanning two or three years, it is possible to identify trends. Accounting methods Keeping accounts simply means finding a way to store financial information so that the organisation can show how it has spent its money and where the funds came from. Accounting records can be kept in a manual format ie hardback books of account or in a computerised format in one of many accounts packages available. There are two main methods for keeping accounts: o Cash accounting o Accruals accounting. The two methods differ in a number of ways but the crucial difference is in how they deal with the timing of the two types of financial transaction: 60 Mango 2016

75 Cash transactions which have no time delay since the trading and exchange of money takes place simultaneously. Credit transactions which involve a time lag between the contract and payment of money for the goods or services. Significantly, the method we choose to record transactions will produce different financial information as managers we need to know the basis of accounting to better understand financial reports. Cash accounting This is the simplest way to keep accounting records and does not require advanced bookkeeping skills to maintain. The main features are: Payment transactions are recorded in a bank (or cash) book as and when they are made and incoming transactions as and when received. The system takes no account of time lags and any bills which might be outstanding. The system does not automatically maintain a record of any money owed by (liabilities) or to (assets) the organisation. The system cannot record non-cash transactions such as a donation in kind or depreciation. When summarised, the records produce a Receipts and Payments Account for a given period. This simply shows the movement of cash in and out of the organisation and the cash balances at any given time. See Appendix 7 for a sample Receipts and Payments Account. Accruals accounting This involves double entry bookkeeping which refers to the dual aspects of recording financial transactions to recognise that there are always two parties involved: the giver and the receiver. The dual aspects are referred to as debits and credits. This system is more advanced and requires accountancy skills to maintain. Mango

76 Expenses are recorded in a general ledger as they are incurred, rather than when the bill is actually paid; and when income is truly earned (ie we are 100% certain it will be paid) rather than when received. By recognising financial obligations when they occur, not when they are paid or received, this overcomes the problem of time lags, giving a truer picture of the financial position. The system can deal with all types of transactions and adjustments. The system automatically builds in up-to-date information on assets and liabilities. These records provide: an Income & Expenditure account summarising all income and expenditure committed during a given period and a Balance Sheet which demonstrates, amongst other things, money owed to and by the organisation on the last day of the period. Table 4.1: Summary of cash and accruals accounting CASH ACCRUALS Accounting system Single entry Double entry Transaction types Cash only Cash and credit Terminology Receipts and payments Income and expenditure Main book of account Bank (or cash) book Nominal (or general) ledger Skill level Basic bookkeeping Advanced bookkeeping Non-cash transactions No Yes Assets & liabilities No Yes Reports produced Receipts & Payments report Income & Expenditure report with Balance Sheet 62 Mango 2016

77 Hybrid approach Many NGOs adopt a half-way house approach. They use the cash accounting basis during the year and then (often with the help of the auditor) convert the summarised figures at the year-end (or more frequently) to an accruals basis for the final accounts and audit. This includes keeping separate books to record and identify accruals and prepayments (see examples below), unspent grants and capital purchases during the accounting period. See Appendix 10 Note to the Accounts, Note 3, for a Schedule of Creditors and Debtors, identified for Milestone s year-end adjustment process. Example of an accrual An electricity bill covering the last month of the financial year is not received until 4 weeks after the year-end. Even though the payment will be made during the new financial year, the expenditure must be recorded in the financial year that the electricity was consumed. It shows up as a liability on the Balance Sheet. Example of a prepayment Office rent is paid six months in advance. Half of the payment covers the first quarter of the new financial year and is therefore deducted from the office rent account for the current year at the year-end. It is carried forward to the rent account for the financial year when the rent falls due and shows up as a prepayment on the assets list in the Balance Sheet. Mango

78 Which accounting records to keep For a small NGO with very few financial transactions, a simple bookkeeping system is all that is needed. As an organisation grows and takes on a number of projects and different sources of funding, its reporting requirements, and therefore its financial systems, will become more sophisticated. Accounting records fall into two main categories: Supporting documents Books of account. Supporting documents Every organisation should keep files of the following original documents to support every transaction taking place: o Receipt or voucher for money received o Receipt or voucher for money paid out o Invoices certified and stamped as paid o Bank paying-in vouchers stamped and dated when money is taken to the bank o Bank statements o Journal vouchers for one-off adjustments and non-cash transactions. With these documents on file it will always be possible to construct a set of accounts. Other useful supporting documents include: o Payment voucher (PV) o Local purchase order (LPO) o Goods received note (GRN). 64 Mango 2016

79 Books of account The minimum requirements for books of account are: o Bank (or cash) book for each bank account o Petty cash book. For organisations with salaried staff, valuable equipment and significant levels of stock, the following records, where relevant, may also be kept as part of a full bookkeeping system: o General/nominal ledger o Journal or day book o Wages book o Assets register o Stock control book. Supporting documentation Receipts Explain: When? How much? What? Who? Why? It is very important to maintain supporting documents in the form of receipts and vouchers for all financial transactions. These should be cross-referenced to the books of account and filed in date or number order. Apart from being required by the external auditor to support the audit trail, certified receipts also provide protection to those handling the money. Mislaid or incomplete records can result in suspicion of mismanagement of funds. Keep separate files for receipts for money coming into the organisation and money going out. Mark invoices paid with the date and cheque number to prevent their fraudulent re-use by an unscrupulous person. Well maintained files provide invaluable information to the organisation such as the trends in price increases, details of equipment purchased, past discounts, etc. Mango

80 Bank book basics The bank book or cashbook or cash analysis book is the main book of account for recording bank transactions (ie cash transactions). It is normal to maintain a separate bank book for each bank account held as this makes it easier to reconcile each account at the end of the month. See Appendices 3 and 4 for a sample bank book. With a manual (ie paper based) bank book, receipts are usually entered on the left side and payments on the right and each page is ruled into columns (see Figure 4.1 for a typical layout). The number of columns required will depend on the type and volume of transactions. Each transaction is entered on one line of either the Receipts page or the Payments page in date order. The column headings prompt you to enter key information eg date, cheque number, payee, description, amount, category of transaction, etc. The columns are totalled at the end of each page or accounting period. Analysis columns These are what make the bank book such a useful record. These columns (numbered 1 to 9 in Figure 4.1) include the main categories of income and expenditure as identified in your Chart of Accounts and your budget. They allow you to sort and summarise transactions by budget category which in turn helps to compile financial reports quickly and easily. Figure 4.1: Typical bank book layout LEFT SIDE RIGHT SIDE Receipts of money into the bank Payments out of the bank Date/details Date/details Mango 2016

81 Bank reconciliation The bank book should be checked with the bank s records the bank statement at least once a month, more frequently for very busy bank accounts. This is called the bank reconciliation. The purpose of a bank reconciliation is to make sure that the organisation s own records agree with the bank s records and to pick up any errors or omissions made by the bank or the organisation. A bank reconciliation involves taking the closing bank statement balance for a particular date and comparing it to the closing bank book balance for the same date. If there is a difference between these two closing balance figures, the difference must then be explained. In practice, there will almost always be a difference because of timing delays, such as: Money paid into the bank which is not yet showing in the bank s records Cheques issued to a supplier but not yet banked by the supplier Bank charges and bank interest which get added to the bank statement by the bank periodically Errors either made by the bank or when recording entries in the bank book. See Appendix 6 for a completed bank reconciliation form and Appendix 21 for a blank form to help you with this process. Table 4.2 summarises the reconciliation process and actions to take when discrepancies are discovered. Mango

82 Table 4.2: Bank reconciliation In On bank Example Action Item: cashbook statement Receipt Cash received in the office, but not yet banked. Monitor bank statement (all cash received Cash fraud? must be banked) Bank interest Receipt received Donor grant transferred, no Enter into the cashbook advice note sent Monitor Payment Cheque sent to supplier, not presented to the bank bank statement Contact supplier if older than two months Payment Bank charges or bank interest paid Enter into the cashbook Omission or Cashbook error duplication of a transaction Figures entered Correct the cashbook incorrectly Bank statement error Bank recording error Cheque fraud Contact the bank 68 Mango 2016

83 Petty cash book Petty cash records are kept in a similar way to the bank book records. As both sets of figures will eventually have to be combined to produce financial reports, it makes sense to set out the books in a consistent manner. A sample petty cash book can be seen in Appendix 5. The petty cash book can either be kept in a loose leaf or bound book format. It does not however, require more than one analysis column on the Receipts side because the only money that is paid into petty cash is the float reimbursement. The petty cash book will also require fewer analysis columns for payments because petty cash will not (usually) be used to pay for larger items such as salaries, office rent, etc. There are two ways of keeping petty cash: o fixed float or imprest system o variable or non-imprest system. Fixed float or imprest method With the imprest system you have a fixed float of, say, $50 and when the cash balance gets low, you top up the float by exactly the same amount that you have spent since the float was last reimbursed. Example: Receipts/vouchers for cash spent total: $34.60 Cash remaining in cash box counted: $15.40 TOTAL FLOAT $50.00 Reimbursement cheque written for: $34.60 An advantage of this system is that at any time you count the money plus vouchers in the tin, they should always add up to the fixed float amount. Also, it is much easier to incorporate petty cash spending into the accounts as the reimbursement cheque is entered in the analysed bank book. See how the reimbursement cheque for the petty cash book in Appendix 5 has been written in to the bank book in Appendix 4. Look for cheque no on 12/01. Mango

84 Variable float or non-imprest method An alternative is to draw cash from the bank in round sums as required. If you use the non-imprest method you will need an extra column in your bank book headed petty cash withdrawn. When reconciling this float you will have to add up all the petty cash withdrawals since the last reconciliation and add on the cash balance brought forward to get a total of the cash float for the period. This total should then be the same as the total spent since the last reconciliation plus the cash left in the tin. A more complicated and time consuming process! Full bookkeeping systems Organisations requiring a full bookkeeping system use a series of ledgers (this just means books of account), depending on the activities of the organisation. The general or nominal ledger This is a central record which pulls together basic bookkeeping information from the main working books of account (bank book, petty cash book, sales and purchase ledgers). The general (or nominal) ledger is rather like a series of post boxes or pigeonholes used to sort basic financial information. It has one page for each category of income, expenditure, assets and liabilities and information is posted from the other accounting books into each relevant box. This sorting mechanism is especially useful when an organisation has several projects and different donors requiring different reports. The general ledger plays a central role in the double-entry bookkeeping system and is the basis for the trial balance (see below), the starting point for preparation of financial statements. Other ledgers Other elements in a full-bookkeeping system include: o Sales ledger and sales day book (but only if you have sales) 70 Mango 2016

85 o Purchase ledger and purchase day book o Stock ledger o Journal. These, together with the bank book and petty cash book are the day-to-day working accounts books. It is quite possible to set up a general ledger without these additional ledgers; the choice will depend on the activities of your organisation. The Journal is used to record unusual, one-off transactions which cannot be recorded easily in other books of accounts. These will include non-cash transactions (such as depreciation and donations-in-kind), adjustments and corrections. A journal entry follows the rules of double entry and will always include entries to at least two accounts. For example, a donation-in-kind in the form of rent-free office space would be recorded as income under Donations and expenditure under Office rent. Wages records Employers have a statutory duty to maintain records of all wages paid and deductions made. Failure to keep these records could result in a heavy fine. Be sure to familiarise yourselves with the arrangements of your own Department of Taxes and keep the latest tax deduction tables. Larger organisations should also keep a separate wages book, which brings together all information on staff salaries and deductions. Wages books can be purchased from stationery suppliers in a pre-printed format or are available as addons to accounting software packages. Mango

86 What is a trial balance? The trial balance (or what accountants often refer to as the TB ) is simply an arithmetical check on the accounts maintained using the Double Entry method of accounting. It is also the basis for the preparation of accrualsbased financial statements. At the end of an accounting period usually monthly all the accounts categories having a balance in the general ledger are listed on a summary sheet to form a Trial Balance. Providing no errors have crept in during the recording and summarising stages, the total of debit balances on the list will equal the total of the credit balances. Figure 4.2 illustrates which figures from the trial balance end up where in the annual financial statements. Figure 4.2: Trial balance leading to financial statements Trial balance Debit balances on Credit balances on accounts accounts Expenses Income Assets Liabilities Income & Expenditure a/c Balance Sheet Figure 4.3 shows how the trial balance is the final stage of the accounting process the result of recording, classifying and summarising the many different transactions that take place in an organisation. 72 Mango 2016

87 Figure 4.3: How it all fits together Mango

88 What are financial statements? Financial statements are produced from the organisation's accounting records. They are a summary of all the transactions for a specified period of time and show the financial position of an organisation. In particular, the financial statements tell us: where the organisation's money came from how the money was used up the outcome for the period, ie a surplus or deficit what the organisation is worth (on paper). Financial statements can cover any period of time for example, a month, a quarter or one year. The annual financial statements are used as the basis for the annual accounts and external audit. It is common for the annual financial statements to include the previous year's figures for the purpose of comparison - so you can see what has changed from one year to the next. Is it getting better - or worse? The simplest of all financial statements is the Receipts & Payments report. This is a summary of the cashbook (see Appendix 7) and includes details of cash balances at the start and end of the reporting period. The other two main reports relevant to NGOs are: The Income & Expenditure report The Balance Sheet. Together these contain a lot of useful information. In the chapter on financial reports, we look at how to analyse the information in the financial statements. 74 Mango 2016

89 The income and expenditure report In the not-for-profit sector, the equivalent of the profit and loss account is the Income & Expenditure report (or account). See Appendix 8 for an example. It is either produced from a trial balance (as described above) where the accruals-based system of accounting is used; or it is based on a receipts and payments account with adjustments for loose ends. It records as a summary: all categories of income and expenditure which belong to that year all income not yet received but belonging to that financial year all payments not yet paid but belonging to that financial year. Income items usually appear first in a list down the page, followed by the summary of expenditure items. The difference between total income and total expenditure, often called the outcome, appears on the bottom line and is expressed either as: excess of income over expenditure where there is a surplus; or excess of expenditure over income where there is a deficit. This excess figure is then included on the Balance Sheet under the heading of accumulated funds. There should be an accompanying Balance Sheet for the same date that the Income & Expenditure report is prepared at. The Balance Sheet The purpose of a Balance Sheet is to assess the financial position or net worth of an organisation at a given date. If the organisation ceased operating at that date and all of its assets were converted into cash, and all of its debts were paid off, then what was left over would be what the organisation was worth. See Appendix 9. Mango

90 The Balance Sheet is a list of all the assets and liabilities on one particular date and provides a snapshot of the financial position of an organisation. Components of a Balance Sheet The Balance Sheet is in two parts. One part records all balances on assets accounts, the other records all balances on liabilities accounts plus the Income & Expenditure account balance. The Balance Sheet will either be presented with the assets listed on the left and the liabilities presented on the right of the page, or more commonly nowadays, listed down the page with assets presented first then liabilities deducted from them. Assets Assets are classified into two parts: Fixed assets tangible long-term assets such as buildings, equipment and vehicles, having a value lasting more than one year. Fixed assets are shown on the Balance Sheet after an allowance for wear and tear or depreciation has been made (see an explanation of what depreciation is later in this chapter). Current assets the more liquid assets such as cash in the bank, payments made in advance and stocks. These, in theory at least, can be converted into cash within 12 months. The term liquidity is used to describe how easy or otherwise assets can be turned into cash. So money held in a bank account is considered to be very liquid, while money tied up in a vehicle is clearly not liquid at all. Liabilities Liabilities are also divided into short and long-term liabilities: Current or short term liabilities including outstanding payments, and short-term borrowings ie those having to be paid within 12 months. Long-term liabilities such as loans that need to be paid after 12 months. However, for NGOs such borrowings are not common. 76 Mango 2016

91 Working capital These are the funds that the organisation has available as a cushion or safety net for running the organisation s operations in the short term. Also known as net current assets, they are calculated by deducting immediate debts (current liabilities) from short-term funds (current assets). Accumulated funds Accumulated funds represent the true worth of the organisation in the form of capital and/or cash reserves which have been built up from surpluses in previous years. Accumulated funds are classified as liabilities. In an NGO the funds are held in trust for the organisation in pursuance of its objectives. If the NGO should close down, any funds remaining after all the debts were paid off would have to either be returned to the original donors (practically quite difficult to do) or passed to another NGO with similar objectives. Table 4.3 summarises the main components and typical layout of a Balance Sheet (but do note that terminology does vary). Mango

92 Table 4.3: Components of a Balance Sheet Component: FIXED ASSETS: CURRENT ASSETS: Cash Debtors Prepayments Grants Due Stocks Description: Less liquid assets, those having a significant value lasting more than one year, eg cars, office equipment, property. The more liquid assets can usually be converted into cash within one year. Money held in the bank and as cash. Money owed to the organisation such as loans and unpaid invoices. Value of items paid for in advance such as insurance premiums or office rent. Grants owed to the organisation for projects already started in the reporting period. The value of raw materials or supplies such as publications or T-shirts for sale. CURRENT LIABILITIES: Those paid within one year of the year-end. Creditors & accruals Grants in advance Money owed by the organisation at the year-end such as bank overdrafts and unpaid bills. Grants received for a particular purpose but not yet spent, so carried forward to the next financial year. OTHER LIABILITIES: Longer term commitments and reserves. Accumulated funds General funds Designated funds Long-term loans The total of all accumulated surpluses and deficits achieved since the organisation started. The funds are held as cash and/or equipment and can be restricted or unrestricted. These are the part of the accumulated funds that are unrestricted and available for general use - the organisation's 'safety net' money. Also called General purposes fund. Part of the General funds, money set aside for specific purposes, eg replacing equipment. Any loans to others that have to be repaid in more than 12 months time, eg a mortgage on a building or a capital loan from a donor. 78 Mango 2016

93 What is depreciation? Capital expenditure, such as that on buildings, computer equipment and vehicles, is expenditure which covers more than one accounting period and retains some value to the organisation. Depreciation is how we account for the cost of wear and tear on fixed assets. It allows the original cost of the item to be spread over its useful life. The amount calculated for depreciation is shown as an expense in the accounts and deducted from the previous value of the asset. As a non-cash transaction, depreciation is entered in the accounts using a journal entry. There are several methods used to calculate the cost of depreciating assets, but the two most commonly used are: Straight line method and reducing balance method. In the straight line method the amount to be depreciated is spread evenly over a pre-arranged period. For example, a computer purchased for USD 1,000 expected to last for 4 years will be depreciated at USD 250 per year for 4 years. At the end of 4 years the computer will have a zero net book value ie it will have no value as far as the accounts are concerned. In reality, it may have a second hand market value. The reducing balance method fixes a percentage reduction in value so that the item loses more value in the earlier years. Example: A car is purchased for USD 10,000. It is decided to depreciate it over 4 years ie by 25% per year. Table 4.4 shows how the equipment is depreciated over its useful life (all figures are rounded to nearest dollar). Table 4.4: Depreciation schedule Year Depreciation calculation Net book value Year 1 $10,000 x 25% = $2,500 $7,500 Year 2 $7,500 x 25% = $1,875 $5,625 Year 3 $5, 625 x 25% = $1,406 $4,219 Year 4 $4,219 x 25% = $1,055 $3,164 Mango

94 Note that when using this method, the asset is never completely written off. At the end of Year 4 it will still have a residual value. In this example, the car will be valued in the accounts at USD 3,164. This recognises that the item may have a resale value when it comes to replacing it. Accounting for shared costs Some costs cover more than one project or activity. In this case, it is important to identify which activities the costs should be charged to. There are two types of shared costs: Those that are truly direct costs and belong to two or more projects Those that are truly indirect costs that must to be shared across all projects in the organisation. For truly direct project costs eg the cost of using a shared vehicle for project activities these must be allocated according to actual use to the relevant project cost centre. It is best to make the allocation when the transaction is entered into the accounting records. For truly indirect costs ie central support costs such as the central office running costs or the annual audit fee these must be apportioned in a fair and justifiable way across all cost centres. Central support costs are often shared out between cost centres in a prearranged ratio. This is more commonly entered in the accounting records at the end of the reporting period by making one adjustment entry. The decision on how to apportion costs between cost centres can be based on different criteria according to what is known as the cost driver, eg: o Full-time equivalent (FTE) staff o Number of cost centres o Size of each project budget o Project staff costs o Amount of space used by a department. There is no hard and fast rule for apportioning central support costs to projects. It should however be logical, transparent and consistently applied. 80 Mango 2016

95 Chapter 5 5 Financial Reports Making sense of the numbers This chapter: Identifies who needs financial reports and why Describes the different types of financial report for programme management and stakeholder accountability Shows how to interpret financial statements using trend and ratio analysis Explains how to use the information in management accounts Outlines the important features of donor reports Outlines reasons for reporting to beneficiaries. Who needs financial reports? As we have seen, one of the main reasons for keeping accounting records is to access information about how the organisation is being run. Having set up accounting systems and budgets, the next step is to produce financial reports to report on and monitor the organisation s financial affairs. Mango

96 Financial reports are needed primarily by those responsible for managing the organisation and by current and potential donor agencies. Those responsible for financial management of an NGO also need to give an account of their stewardship to a wide range of stakeholders. The main reporting outputs include: During the financial year accounting information is summarised and turned into Management Accounts for internal monitoring of progress against the budget. At the end of the year, the Annual Accounts (ie the Balance Sheet and Income & Expenditure account) are produced to report on the outcome to external stakeholders. At intervals during the year, an NGO will also be required to complete special progress reports to donor agencies. Providing the accounts are kept in a suitable way and have been checked for accuracy, putting together a financial report is not as time-consuming as you might think. Financial reports must be timely, accurate and relevant. Table 5.1 summarises the main users of NGO reports and why they need this information. From this list, we can see that there are many different users of financial reports both internal and external stakeholders using financial information for management and accountability purposes. 82 Mango 2016

97 Table 5.1: Who needs financial information? Stakeholder Project staff Managers Finance staff Board of Trustees Donors Government departments Project beneficiaries The general public Why do they need it? To know how much money and resources are available for their projects and what has been spent so far. To keep an eye on how project funds are being used, especially compared to the original plans. To help plan for the future. To make sure that there is enough money in the bank to buy the things the NGO needs to run its programmes. To keep an eye on how resources are being used to achieve the NGO s objectives. To make sure their grants are being used as agreed and that the project s objectives are fulfilled. To consider whether to support an organisation in the future. To make sure that the NGO pays any taxes due and that it does not abuse its status as a not for profit organisation. To know what it costs to provide the services they are benefiting from and to decide if this is good value for their community. To know what the NGO raises and spends during the year and what the money is used for. It is not surprising, therefore that we need different kinds of reports for different users, as summarised in Table 5.2. Table 5.2: Different reports for different users Internal External Programme management Budget monitoring report Cashflow report Donor progress report (financial and narrative) Stakeholder accountability Board report Donor report Audited financial statements Annual report Reports to beneficiaries Mango

98 What are the annual accounts? In the previous chapter we looked at the Balance Sheet and Income & Expenditure account ie the financial statements. When these are produced at the end of the financial year, they become the annual accounts. Accompanied by a report on the work of the organisation, the annual accounts form the main information package for external stakeholders. For this reason, the annual accounts should: present the organisation in the best possible light help to promote its work meet the needs of those using the accounts meet the requirements of auditors. If an NGO s annual accounts show large accumulated funds, it may give the impression that the organisation is well resourced and donors may be less inclined to give support to new initiatives. There are however, good reasons why an organisation will have cash reserves for example, funds put aside to replace equipment or a building appeal fund. An explanation must be provided to reassure potential donors that their support really is needed. Interpreting financial statements The aim when reviewing an NGO s financial reports is to assess the health of the organisation and to check that funds are being used as intended ie to achieve organisation objectives. Numbers taken on their own don t tell us very much. We need something to measure them against such as comparing them to similar organisations, standard measures or targets, or previous years accounts. When we interpret the Balance Sheet and Income & Expenditure statement we use two types of financial analysis: Trend analysis which asks: how are we doing compared with the last period? 84 Mango 2016

99 Ratio analysis which provides a means of interpreting and comparing financial results. Trend analysis Trend analysis takes at least two sets of figures compiled using the same accounting techniques and showing information for two consecutive periods, usually year on year. By comparing the figures it may be possible to detect trends and use this information to forecast future trends or set targets. Trend analysis is more meaningful if also combined with financial ratio analysis. Financial ratio analysis Financial ratio analysis is used widely in business to assess the profitability and efficiency of companies. Ratio analysis in the not-for-profit sector is less common, but is nonetheless very useful if adapted for the sector. Ratios allow comparison of reports expressed in different currencies and between organisations of different scale by converting them into a like measure. Donor agencies often use this technique when assessing performance, especially to compare relative costs such as central administration between similar organisations or projects. The importance of ratios is in the clues they may provide to what is going on, not as absolute measures of good or bad performance. Ratio analysis helps Board members and managers answer three important questions: Financial sustainability will our organisation have the money it needs to continue serving people tomorrow as well as today? Efficiency does our organisation serve as many people as possible with its resources for the lowest possible cost? Effectiveness is our organisation doing a responsible job of managing its money? Mango

100 Analysing the Income and Expenditure statement You can use ratios on the Income & Expenditure report by converting each line item into a percentage of total income (that means to divide each item by total income and multiply by 100). This gives a guide as to the relative importance of different areas on the statement. For example, the relative costs of administration versus direct project costs. This is useful for drawing attention to the important areas and away from insignificant issues. This calculation will also give an indication of the level of donor dependency by dividing the total of donor grants by total income and multiply by 100. If your financing strategy is leading you towards less dependence on external aid, the dependency ratio will help to set and monitor your target level. A further level of analysis can be obtained by comparing the ratios for the current and previous years figures to detect trends. Analysing the Balance Sheet Again try dividing everything by the total income figure shown on the accompanying Income & Expenditure statement to give an indication of the relative importance of items on the Balance Sheet. The Survival Ratio can be calculated by dividing general reserves, sometimes called free reserves (that s the part of the Accumulated Funds which are unrestricted, not held as capital and for general use) by total income (from the accompanying Income & Expenditure statement). If you then multiply the resulting figure by 365 this will give an indication, in days, of how long the organisation could survive in the coming year if income dried up and levels of activity remain the same. Of course, this is a highly hypothetical scenario as in practice the organisation would contract operations if its income was drastically reduced. The Acid Test or Quick Ratio asks the question: Can we pay off our debts now? It divides Current Assets less the less liquid assets such as stocks and prepayments (in other words, short term debtors and cash balances only) by Current Liabilities (short-term creditors and overdrafts). The resulting ratio should ideally be in the range of 1:1. 86 Mango 2016

101 A ratio of 1:1 suggests an organisation has sufficient cash to pay its immediate debts. The Current Ratio asks the question: Can we pay off our debts within 12 months? It divides total Current Assets by total Current Liabilities to find a further test of an organisation s (longer term) liquidity. A result of 2:1 is considered satisfactory. Again, convert the figures for both years shown on the Balance Sheet to detect significant trends. Mango

102 Ratio analysis: quick reference formulas Ratio: 1. Donor Dependency: Expressed as % Formula: TOTAL DONOR INCOME X 100 TOTAL INCOME 2. Income Utilisation: Expressed as % EXPENDITURE ITEM X 100 TOTAL INCOME 3. Survival Ratio: Expressed in weeks or days GENERAL RESERVES* X 52 or X 365 TOTAL INCOME * these are un-restricted funds for general purposes under Accumulated Funds. Alternatively use Net Current Assets. 4. Acid Test or Liquidity Ratio: Expressed as a ratio n:n* CURRENT ASSETS PREPAYMENTS CURRENT LIABILITIES *Answer should be in the range of 0.8 to 1.2:1. A result of 1 to 1 means there are sufficient funds to cover immediate debts. 5. Current Ratio: Expressed as a ratio n:n* CURRENT ASSETS... CURRENT LIABILITIES *A result of 2:1 is considered satisfactory enough to pay off the debts within 12 months. 88 Mango 2016

103 Management reporting Managers need financial information throughout the financial year to monitor project progress and manage budgets effectively. If reports are produced on a timely basis, any problems can be addressed early on and action taken to put things right. Which reports? The main reports that will be useful to managers are the: o Cashflow report o Budget monitoring report o Forecast report. How often? Ideally, the management accounts should be produced every month and within a few days of the end of the accounting period (any later and the information becomes out of date and less useful). The minimum frequency for management reports is once a quarter. Since the reports are produced so that managers can take decisions about the future management of the organisation, the meetings of the governing body should be set to coincide with the management reporting cycle so that the information is still timely. Where do the figures come from? Figure 5.1 shows how the financial planning and financial accounting processes come together to produce management reports. The reports are compiled by taking summarised figures from the main books of account and the budget for the same period. Providing the accounts and budgets have been set up to use the same Chart of Accounts codes and descriptions, this should be a very quick process and no additional work is required. Mango

104 Figure 5.1: Management reporting flow chart The cashflow report The cashflow report is the cashflow forecast updated with actual receipts and payments each month, plus any new information about future spending or fund-raising plans. It allows managers to predict periods when cash balances are likely to be insufficient to meet commitments and make the most of any surplus funds during the year. Where cash resources are limited, it is important to monitor for the ability to pay creditors on time and to take action when there are early warnings of potential financial difficulty. Options available for managing cashflow include: Exercise good credit control chase debtors for prompt payment Review grant schedules encourage payment in advance rather than in arrears Bank all money received daily Request special payment terms from major suppliers (and stick to them) Pay certain overheads by instalment eg insurance premiums 90 Mango 2016

105 Prioritise major payments Defer action that will lead to additional expenditure eg recruitment, taking on leases, purchasing equipment Negotiate an overdraft facility as short term but expensive remedy. The budget monitoring report This report has several different names (eg budget compared to actual, budget variance and budget versus actual) and can take different forms. But as the titles suggest, the reports take the budget for the reporting period (preferably the phased budget) and compares that with the actual income and expenditure for the same period. See a sample report in Appendix 14. The difference between the budget and the actual result is known as the variance and this can tell us a lot about what is happening in a project. Variance figures will be positive, negative or zero, depending on what has happened. Often, budget monitoring reports also show variances as percentages. For example, the amount of the budget, or grant, used up so far is known as the budget, or grant, utilisation ratio or the burn rate (see below for how to calculate percentages.) We can see the Plan-Do-Review process in action in Rudi s evening out. He set out his plans for the evening and what each activity would cost (PLAN) and then went out with his friends (DO). But it did not all go as planned and his actual spending varied as a result. Table 5.3: Rudi s budget compared to actual report A B C D E Budget item Budget $ Actual spend $ Variance $ Budget utilisation Travel % Food % Entrance Fee (1.00) 133% TOTAL % Mango

106 If we look at the variance column in Rudi s budget compared to actual report (REVIEW) in Table 5.3, it is possible to see the story behind the figures. For example, we can see the effect of Rudi arriving too late to buy the cheaper match tickets: he spent USD 1.00 (or 33%) more than planned on the entrance fee. And because he then didn t have enough money left to buy his bus fare back home (he got a free lift home instead) he under-spent on his Travel budget, using up only 50% of that line. When we review the figures, and in particular the variance column, it helps us to understand why we did not fulfil the plans and build in that learning to the next cycle. In Rudi s case, he learnt that he needs to get to the match earlier to buy a cheap ticket (and his mother learnt that it might be a good idea to give Rudi a bit extra for emergencies to make sure he gets home safely.) How to calculate percentages The budget variance percentage can be calculated in one of two ways. You may use either method but it is important to be consistent: Budget variance $ x 100 Budget for period $ Under-spends will result in a positive % and over-spends will produce a negative % Actual for period $ x 100 Budget for period $ Under-spends will result in a figure less than 100% and over-spends will be more than 100% To calculate the percentage of the budget utilised (the Burn Rate ): Actual spend $ x 100 Total Budget $ A resulting figure of over 100% means the total project budget is overspent. 92 Mango 2016

107 Forecast reports Forecast reports are especially helpful for predicting the outcome for the year and helping with the budget process for the next year. See Appendix 16 for a sample Budget Forecast report. With a fair degree of accuracy you should be able to tell whether the organisation is going to make a surplus or deficit. This is all-important in your relationship with donors: A large deficit can make the organisation appear to be out of control and poorly managed A small deficit can demonstrate a great need and even a sense of good housekeeping A small surplus can suggest good management A large surplus can indicate a failure to meet needs or inexperience in budgeting. There are various ways of reducing a surplus at year-end, including purchasing new or replacement equipment, ordering stocks of stationery and office supplies. There is very little that can be done about a large deficit except to provide an early warning and a very good explanation to stakeholders and hope that there are sufficient reserves to cover it. Analysing budget monitoring reports Budget monitoring reports help to identify problem areas and provide an early warning when key targets are not being met. They may also help detect fraud and errors in the accounts. What should we look for? Key areas to focus on when you pick up a Budget Monitoring Report include: Mango

108 What is the accounting basis of the report is it compiled on the cash or accruals basis? Are there outstanding commitments (see note below)? If so, how does that affect the results? What does the bottom line tell you? Overall, is the budget overspending or under-spending and is it significant at this time in the life of the project or programme? An outcome of plus or minus 10% from the budget is considered to be a reasonable variance. What is the result within budget family groups (ie budget items in the same area, such as Staff costs or Admin costs)? Is spending overall on target across the group? Again, if the result is within plus or minus 10% from the budget, that is generally acceptable. Look for unusual or unexpected results - could this be an indication of a mis-coding or abuse? Are there any significant variances in the individual line items? Are the reasons for the differences explained? For example, the Subsistence Expenses budget is substantially and unexpectedly overspent. Do not just concentrate on over-spending remember that under-spending is just as critical for an NGO. Do linked budget line items (eg activity-related costs) tell the same story or do they contradict? For example, the project materials budget is under-spent suggesting delayed activities but the vehicle running costs are high, which is not logical. Do the budget report figures tell the same story as the narrative project report? Sometimes the figures just do not look right: so trust your instincts and follow up your concerns. 94 Mango 2016

109 A note on commitments Commitments refer to (significant) expenses which have been incurred for a project or organisation in a particular period but haven t yet been accounted for or belong to a future reporting period. Commitments usually occur in a cash accounting system or where there are time delays in reporting all expenditure, eg from field offices. If significant commitments are not taken into account when compiling budget monitoring reports, the results may under- or over-count the true level of expenditure and give a distorted view when compared to the budget. It is important to be aware of outstanding commitments when monitoring a budget or grant because decisions are based on the reported variances and balances available. It could appear that there is more (or less) money available to spend than there really is. Here are two solutions if figures exclude outstanding commitments: Include an extra column in the budget monitoring report to record known commitments Add a note about known commitments in the comments column or covering note. Variance analysis techniques Variance analysis involves looking at variations from budget to identify significant or unusual variances and what has caused them to happen. This helps us plan the next phase. The first task is to identify whether the variance is a positive or negative one. Positive variances are sometimes described as favourable (ie generally good news) and negative ones as adverse (ie generally bad news). A positive variance happens when: actual income is higher than the budgeted amount, or actual spending is lower than budgeted. Mango

110 However, note that a budget under-spend is not always good news for an NGO as this could be because activities are not on target and this may be a cause for concern for the donor. A negative variance happens when: actual income is lower than the budgeted amount, or actual spending is higher than budgeted. The next step is to understand what has caused the variance to happen. In all cases, a variance represents a change from the original plan but what lies behind it? Generally, we can say that variances will be the result of a change in one or more of: the timing of the activity the actual price achieved or the actual quantity of goods or services taken. Figure 5.2: What causes variances? 96 Mango 2016

111 Sometimes a variance may be due to an error in the figures, for instance a mis-coding in the accounting records (which is effectively a change in quantity compared to the plan). We can classify variances using the three criteria in Figure 5.2 to highlight if the variance is temporary or permanent will the variance continue or will it work through the system over time? Example of a temporary variance The project plans to purchase a vehicle in month 1 but it is held up at the port by Customs. The budget monitoring report will therefore show a big positive variance on the Vehicles line (because the budget has not been used yet). By month 2 the vehicle arrives and is purchased just a bit later than planned. The budget monitoring report will no longer show a zero spend on vehicles and the previous large variance will be gone as it was a temporary variance due to a timing issue. The only action required in this case is to chase up Customs to make sure the vehicle arrives so it can be used for the programme as planned. Example of a permanent variance The invoice for the vehicle is paid in month 3. The price of the vehicle has increased by 10% due to a fluctuation in the exchange rate. The budget monitoring report for month 3 now shows a negative variance on the vehicles line equal to the difference between the budgeted price and the actual, higher price paid. This is a permanent variance caused by a change of price. A decision has to be made on how to fund the additional 10% on the cost of the vehicle. Mango

112 Temporary variances Variances caused by a change in the planned timing of an activity (eg due to delays or rescheduling) are described as temporary variances because they will most likely work themselves out during the course of the year. These should be monitored and managed internally, and are generally less of a concern. Permanent variances Variances caused by changes in the price or quantity of particular budgeted items fall into the permanent variances category because once this has happened, there is no going back. The only way to recover the situation is to make an action plan, eg to reduce spending on future items where lines are overspending or increase activity levels where there are savings. Permanent variances are therefore generally more serious and management attention and corrective action is required to get back on track. Action planning Having analysed the figures in management reports, it is then important to work out appropriate corrective action, if needed. Figure 5.3 summarises the actions open to managers to take on variances, once analysed using the classifications systems described above. Deciding on the action to take, will depend on many factors including: knowledge of the project where it is now and what the activity plans are for the next period awareness of external factors eg inflationary trends, dependence on other programmes meeting their targets how serious the variance is how controllable, or otherwise, the budget items are what the impact would be to take no action the funder s rules and conditions. 98 Mango 2016

113 Figure 5.3: Action to take on budget variances It is useful to use a Budget management action planner table (see Table 5.4) to help manage and control your budget. It can be used to discuss action plans with the project team and to monitor progress of the action plan. Mango

114 Table 5.4: Budget management action planner Budget management action planner Line item Variance Var. Contro- Impact on project Action required / % or /$ Type llable? and grant if not by corrected Smile ($12,500) Temp. Yes The delay is CEO to contact Trust Grant 100% causing project delays too as we donor and explain this is causing cannot buy vehicle project delays. Salaries $2,000 Perm t Yes Under spend due to vacant post. This is now filled but project activities delayed which could cause problems with donor. Contact donor to explain why there are delays and request use of under-spend to hire additional staff for a short period to help catch up Table 5.5: How to use the budget management action planner Column heading What it means 1. Line item description The budget line that requires some corrective action. 2. Variance % or monetary value Include items that exceed +/- 10% variation from the budget and which represent a significant sum. 3. Variance Type Permanent or temporary? Remember that temporary variances will work their way through the system but very large ones might still have an impact, eg on cashflow. 4. Controllable? To what extent can you control use of the budget, eg to restrict its use or make savings if over-spent or stimulate its use if underspent. 100 Mango 2016

115 Column heading 5. Impact on project & grant management if not corrected What it means eg Cash flow, achieving targets, meeting timeframes, allowable costs. 6. Action required/by What should be done (and by who) to minimise the impact and get the project back on target and/or to meet donor requirements? Eg budget reforecast or adjustments; advise donor of delays or request no-cost extensions; request unrestricted funds to cover over-spends; change activity plans; put efforts into reducing costs or stimulate spending; etc. Reporting to donors It is worth remembering that donor agencies are themselves accountable to stakeholders (trustees, government, tax-payers, etc.) and they rely on you to provide them with the information they need. Accountability Financial accountability requires that you demonstrate to the donor that their funds have been used for the purpose for which they were intended. The reference point is the original funding application and guidelines are usually provided with the confirmation of grant aid and the contract or agreement signed by both parties. It is important to comply with the conditions and meet reporting deadlines to establish credibility and encourage confidence, and to make sure your grant arrives on time. Terms and conditions of grant aid It is important always to check what you have agreed to do as part of the agreement for funding from each of your donors. Conditions imposed by donors vary enormously but can include: Progress reports frequency, format and style of reports, usually quarterly to coincide with release of grant instalments. Mango

116 Scope and designation of funds what funds may, or may not, be used for; whether funds can be carried forward from one financial year to the next. Administrative overheads the specific items that are allowable or excluded, or a percentage limit based on the total grant. Budget line items specific budget headings/account classifications which correspond with the original grant application. Virement policy ie permission (or otherwise) to transfer surpluses in the budget from one budget heading to another, and within what limits. Accounting method accruals or cash accounting. Bank accounts and interest separate bank accounts are required by some donors and/or they do not allow you to keep any interest earned on sums invested. Depreciation policy how to treat fixed assets purchased with a grant. External audit some donors require a separate external audit. The donor report Donors require that an NGO is able to demonstrate financial soundness before granting the release of funds. This is why the donor report is so important. In most cases the report will include a budget compared to actual summary, accompanied by a narrative report on the activities being undertaken. See Appendix 15 for a sample donor report. Where there are several donors it is important to set up the accounting systems so that the information required by the donor agency can be easily retrieved. Otherwise the organisation will be involved in a tedious information gathering exercise every time a report is required. The use of cost centres is particularly useful here. When putting together a report to donors do: meet reporting deadlines (or request an extension) 102 Mango 2016

117 produce accurate and verifiable figures not conceal under-spends or over-spends explain any significant variations keep the donor informed of any potential problems. Finally, bear in mind that donors have a lot of experience of working with groups like your own; they will almost always respond positively to requests for advice. Presenting financial reports We spend a lot of effort when preparing reports so it is important that they are used and not just put to one side. So do spend some time thinking about who the reader is and what they will find most useful. Exceptions reporting Managers and Board members are busy people and they rarely have the opportunity to read all reports that get sent to them. With financial reports it is good idea to provide an exceptions report a brief cover note that draws attention to key areas or need decisions. The exceptions report is usually no more than one or two pages long and should avoid using technical jargon. It should be brief and easy to read. A suggested layout: Overview of the period being reported ie dates covered; how figures have been compiled; what activities are covered by the attached reports; and author of report. Significant variances - Highlight the most significant variances from the budget and explain the reasons behind the variances. This should not just concentrate on over-spending of budgets under-spending can also be a problem, especially when related to donor-funded projects. Recommendations for action ie corrective action required to deal with the key issues identified in the previous section. Mango

118 For example, strategies to avoid a cashflow crisis in future months; revised activity plans to get projects back on target; restricting use of vehicles where running costs are running too far over budget. Presentation of figures Negative figures in project financial management reports can be represented in two ways: 1,234 or (1,234) Figures are usually rounded to the nearest whole number the cents are not relevant to the overall review of the results. The rounding action sometimes results in totals or sub-totals being out by 1. Alternative formats Graphical formats for example using a bar chart for a budget compared to actual report (as in Figure 5.4) or a pie chart for an Income & Expenditure report are a welcome alternative to tables of figures, especially for people who are less confident around numbers. See also some very interesting ideas on alternative ways to present financial information from Little Fish in Australia: Figure 5.4: Using graphics for financial reports 104 Mango 2016

119 Similarly, rather than present figures, we might simply present a list of statements such as in this example of an alternative Balance Sheet format (see Appendix 9 for the usual presentation): Milestone Project Financial position on 31 December 20xx: a) Our programme equipment and vehicles after a deduction for wear and tear had a value of UC112,091. b) We had UC8,095 held as cash and in the bank. c) The Smile Trust owed us UC10,000 for the final quarter grant; and we had some outstanding fees and other small amounts owed to us totalling UC2,459. d) We owed a total of UC3,262 in unpaid invoices. e) This means that if we paid off everything we owe from our available funds, we would have UC17,292 to continue our operations. f) Our overall reserves, including the value of our equipment and vehicles, total UC129,383. Reporting to beneficiaries Most NGOs recognise the need for downward accountability ie reporting back to the communities they work with on what they have done with the funds raised in their name. Few NGOs have set up systems to deliver it. Most NGO systems focus on upward accountability, such as reporting to donors, Boards and Head Offices. To participate fully in an NGO s work, beneficiaries need access to information about the NGO s plans, resources and activities. Increasing transparency and accountability to beneficiaries has many benefits including: Strengthening trust and respect between NGO staff and beneficiaries Improving the quality of programme decisions, as beneficiaries provide feedback on how funds are being spent Mango

120 Empowering beneficiaries to make their own decisions on their own behalf Reducing the risks of inefficiencies and fraud Encouraging finance staff to get more involved with NGO field work. Introducing this level of financial transparency may naturally hit some obstacles, such as adding to the burden of already busy staff. But if sensitively done, the benefits generally far outweigh the costs. How can NGOs provide financial reports to their beneficiaries? Financial reports must provide information that is both useful for users and in a style that is easy for users to understand. The following guidelines set out some general principles which can help achieve this when preparing financial reports for beneficiaries. Content Content should be relevant to local people, about the specific activities that NGOs have carried out on their behalf. Simple reports in local currency showing monthly expenditure compared to budget work well. Expenditure can be summarised by activity, by geographical area, by budget line or some combination of these. The total budget for each activity, area or budget line should also be included. As a rule of thumb, each financial report should have no more than 15 lines of information: more lines make reports confusing. Presentation Publish reports in local languages and make use of pictures or simple graphs as it is easier for some people to understand visual reports than those just using numbers. Aim to make financial reports publicly available at the community level. For example: use white-boards or flip-charts to publicly display the results at NGOs offices, health centres or distribution points, backed up with paper copies of reports at the same places 106 Mango 2016

121 present regular reports to communities at community meetings or to community leaders at project management meetings publish summary reports in newspapers and other local media. Who provides reports? Financial reports can be provided either by an NGO s finance staff or by its programme staff. Ideally finance and programme staff should work together. For example, invite finance staff to explain reports at community meetings. For more ideas on how to report to beneficiaries and information about Mango s Who Counts? campaign, please visit: Mango

122 Summary: Twenty questions Here are 20 questions to ask when reviewing financial information: Auditor s report on the annual financial statements 1. How long ago was the last audit conducted? 2. What does the Auditor s Opinion say is it qualified or unqualified? Balance Sheet 3. Does the organisation have enough ready cash (see Cash at Bank listed under Current Assets) to pay off its immediate debts (see Creditors)? 4. How long could the organisation survive if all of its funding dried up? (Calculate the survival ratio ) How does this compare to last year? Income & Expenditure (or profit and loss) account 5. Is income and expenditure broadly in balance? (Look for net income/expenditure) 6. Is there a significant increase or decrease in activity levels from the previous year? 7. What is the balance of direct project costs vs. admin costs? Is it reasonable for the size and nature of the organisation? 8. How donor dependent is the organisation? (Calculate the donor dependency ratio ) 108 Mango 2016

123 Budget monitoring report 9. Is expenditure broadly in line with the budget? (+ 10%) 10. Is income broadly in line with the budget? 11. Are there any significant variances? If so, have they been satisfactorily explained? 12. What action is being taken to correct significant variances eg under-spending as a result of delayed activity plans? 13. Are there any large bills outstanding which could substantially affect the figures shown? 14. Are we owed any large sums of money? What is being done to retrieve them? 15. Are there any un-budgeted expenses which may occur in the rest of the year? 16. What is the projected end-year outcome? Is this outcome satisfactory? If not, what steps can be taken to change the result? Cashflow forecast 17. Is there enough cash in the bank to fulfil the activity plan in the next six months? 18. What grants are due and are they still expected to come through on time? 19. Are spare cash balances invested to produce the best return? General 20. What non-financial figures are being produced to show how the programme of activities is progressing? Mango

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125 Chapter 6 6 Safeguarding Your Assets It is more sensible to establish a system to deter fraud rather than one to discover it. This chapter: Explains why we need internal control Introduces the four actions of internal control Introduces delegation of authority and separation of duties Highlights the importance of cash control, physical controls and checking routines Discusses ways to manage and control fixed assets. Managing internal risk This chapter looks at managing the internal risks facing an NGO on a day-today basis. We do this by introducing controls, checks and balances to minimise losses and detect errors and omissions in the accounting records. Controls are also very important in protecting all those who handle the financial affairs of the organisation as they remove any suspicion of, or temptation to, dishonesty. Mango

126 Four actions for internal control A good way to think about and set up your internal control systems and procedures is to use the Four Actions approach: 1. DIRECT: to encourage the right action This means setting policy and giving clear instructions on who does what and what processes to follow. For example, setting a Procurement policy and setting out limits of authority in a delegated authority document. This action is one we generally take before activity takes place. 2. PREVENT: to deter the wrong actions Sometimes, there will situations where someone fails to follow the guidance in the Direct stage. So we need to set up systems that will, as far as possible, minimise the risk of opportunistic theft or loss due to incompetent actions. This includes commonsense physical controls and checking actions during a process. These actions generally operate during implementation. 3. DETECT: identify if and where it has gone wrong We cannot prevent all incidences of loss, so we then need to have systems in place to pick these up after the process is completed (and learn from it too). For example, cash counts, bank reconciliations and internal audit. These actions take place after the activity has taken place. 4. CORRECT: put right the errors or losses detected This includes correcting accounting records, changing policies to reduce the chance of the loss happening again and retraining staff. This process of learning links on to Direct as guidance is updated, so completing the cycle. Where further action is needed, corrections take place on an ongoing basis. Figure 6.1 summarises some of the key internal controls under the Four Actions headings. Some controls can fall under more than one heading as they have multiple effects. 112 Mango 2016

127 Figure 6.1: The Four Actions process There are several key internal controls that we will look at through the lens of the Four Actions: Delegated authority and separation of duties Cash control Physical control Checking routines Reconciliation routines. Delegated authority and separation of duties Delegated authority falls under the DIRECT heading of controls. The Board of Trustees delegates authority through the Chief Executive for the day-today running of the organisation. In a large and busy organisation it is not practical (or safe) to allow one person to make all the decisions and authorise all transactions. Mango

128 The Chief Executive will, therefore, further delegate authority to members of the staff team to relieve the load and to ensure smooth operation during absences of key staff. Delegated authority Every organisation should decide in advance who should do what in finance procedures. It is good practice to record what has been decided in a delegated authority document. Its purpose is to clarify who has the authority to make decisions, commit expenditure and sign legal undertakings on behalf of the organisation so that there is no confusion about responsibility. See an example in Appendix 2. The delegated authority document should include instructions for such duties as: o Placing and authorising orders for goods and services o Signing cheques o Authorising staff expenses o Handling incoming cash and cheques o Access to the safe and petty cash o Checking and authorising accounting records o Signing legal undertakings. The delegated authority document must be approved by the Board and regularly reviewed to ensure it remains relevant. It should also outline deputising arrangements to cover for absence of key personnel. 114 Mango 2016

129 Authorisation rules A delegated authority document should observe some basic rules: Define the lowest level of authority. Those higher up the management ladder will automatically have the same permissions. Outline deputising arrangements to cover for absence of key staff. Prevent anyone from authorising a transaction from which they will personally benefit. This would make the individual vulnerable to accusations of improper behaviour. Avoid staff authorising payments to their managers they must be signed by someone who is more senior in the management structure (or the Board). Limits or conditions must be clearly defined, eg a project officer may be authorised to commit expenditure up to a specified amount, within certain categories or within budget. A breach of delegated authority rules is a serious matter and should be dealt with through the organisation s disciplinary procedures. A note on authority for bank payments Each organisation should have a panel of signatories from which to select the required number of authorising signatures. There should be sufficient people nominated to ensure efficient administration of bank payments. It is usual to have more than one signature on a cheque to help avoid fraud. Signatories should be regularly reviewed and the list updated when people leave the organisation. NEVER ask signatories to sign blank cheques for future use as this defeats the whole purpose of having more than one signatory. Mango

130 Separation of duties This is linked to delegated authority, but falls under the PREVENT heading since it aims to remove the opportunity for theft and fraud. By sharing the various duties within a finance procedure around a team, it protects those involved and removes the temptation to mis-use funds. For example, it is risky to allow one person to order some goods, then receive them and also authorise the payment without someone else involved in the process. Apart from weakening financial control, this puts too much responsibility on one person and if they should leave the organisation or are absent for long periods, then the finances will grind to a halt. The process for buying goods and services is a very good example of the practical application of delegated authority and separation of duties. The procurement procedure A Procurement procedure sets out the steps and conditions that have to be followed by staff to acquire goods and services so that the objectives of the organisation can be fulfilled efficiently and effectively. This is an example of a typical DIRECT control action since it lays down rules to follow when making purchases. But a well written procurement procedure also incorporates the principles of separation of duties so it also encompasses the PREVENT action. The procurement procedure: outlines the process and authorities for ordering, receiving and paying for goods and services (see below) clarifies when it is necessary to obtain quotations from suppliers eg 2 quotations for all expenditure over $1,000 describes which method of payment or acquisition is to be used for different goods and services eg when it is best to use petty cash, bank transfers (eg salaries) or supplier accounts (eg stationery, fuel) includes a list of approved contractors or suppliers, if used. Each organisation must design a procurement procedure which suits its own circumstances. Figure 6.2 shows some typical stages in the process of purchasing a larger item with a supplier account (with the cash accounting systems in place). 116 Mango 2016

131 Figure 6.2: Typical procurement process Prepare specification, check budget Prepare Purchase Requisition Check & authorise requisition Obtain quotations Receive goods Issue Purchase Order Select supplier (Purchasing panel) Receive & check invoice Prepare & authorise Payment Authority* Pay supplier invoice Enter payment in cashbook* [*assumes cash accounting system used] A typical procurement procedure 1. Specify goods or services to be purchased, check budget The standard, quantity and price of goods or services required, as described in the activity plans, is specified clearly. The amount currently available in the budget for the item to be purchased should be checked at the specification stage in case the price has changed since the budget was prepared. 2. Prepare purchase requisition An internal request is prepared usually on a standard form for that purpose to formally request the purchase of the goods or services specified. The request will include a description of the purchase and state why it is required. 3. Authorise purchase requisition The purchase requisition will usually be checked and authorised by the budget holder or other nominated person to verify that there is a genuine reason for the purchase. The available budget will usually be checked again at this stage. Mango

132 4. Obtain quotations Quotations from reputable independent suppliers are requested (in accordance with internal procedures and donor rules) to make sure the organisation gets best value for money and to minimise the risk of collusion. 5. Select supplier Quotations are reviewed and a supplier is selected based on price, quality, delivery times and after sales terms to ensure value for money. For larger purchases, it is usual to have a Purchasing Panel a small group of managers who take responsibility for selecting the supplier. 6. Issue (authorised) Purchase Order (PO) The authorised Purchase Order is sent to the selected supplier with a copy kept on file with the supplier s quotation. This is a legally binding contract. 7. Receive goods from supplier When supplies are delivered and received, a Goods Received Note (GRN) is usually signed to confirm receipt and a copy filed for later reference. 8. Receive and check supplier invoice The invoice should be checked and matched up with the GRN, PO and quotation, usually by the finance team. 9. Prepare and authorise payment authority The Payment Authority is attached to the invoice and all the supporting documents. It includes budget and accounting codes and must be checked and authorised by the budget holder or other nominated person. 10. Pay supplier invoice Payment should be made to the supplier within the specified payment terms, usually 30 days. 11. Enter payment into cashbook The final stage is to record the payment in the organisation s books of account. 118 Mango 2016

133 Cash control NGOs often work in environments where cash is the preferred way to pay for goods and services. We have to take special care with cash because it is vulnerable to theft. Cash control is all about PREVENTING loss and misuse of cash. Here are Seven Golden Rules for Handling Cash: 1. Keep money coming in separate from money going out Never put cash received into the petty cash tin, it will lead to error and confusion in the accounting records. All money coming in must be paid into the bank promptly and entered into the records before it is paid out again. Failure to do this could distort financial information. For example, a training course charges $25.00 to each of the 10 participants. The cost of food and room hire is $ and this is paid from the course fees received on the day. The balance of fees $ is paid into the bank as Training Fees. Why is this a problem? The cost of providing food and room hire has not been recorded in the accounts and so will not appear in the financial report. Similarly, as only the net amount of fees received was paid into the bank, it would appear that only a few people actually attended the course. 2. Always give receipts for money received This protects the person receiving the money and assures the person handing it over that it is being properly accounted for. Receipts must be written in ink, not pencil, and preferably from a numbered receipt book. 3. Always obtain receipts for money paid out Sometimes this may not be possible. For example, when purchasing materials from a market stall. In this case the cost of each transaction should be noted down straight away so that the amounts are not forgotten and these can then be transferred to a petty cash slip or internal receipt and authorised by a manager. Remember no receipt means there is no proof that the purchase was made. Mango

134 4. Pay surplus cash into the bank Having cash lying around in the office is a temptation to a thief and the money would be better managed and earning interest in a bank account. A casual approach to cash on the premises might also lead to people wanting to borrow from it many a sorry tale of fraud has started in this way. You should always aim to pay cash received into the bank on a daily basis or, at the very least, within three days of receipt. 5. Have properly laid down procedures for receiving cash To protect those handling money, try to have two people present when receiving cash. Both should count the cash and sign the receipt. 6. Restrict access to petty cash and the safe Keys to the petty cash box and the safe should be given only to authorised individuals. This should be recorded in the organisation s Delegated Authority document. 7. Keep cash transactions to an absolute minimum Use cash only when all other methods are inappropriate. Wherever possible, set up suppliers accounts and pay invoices by cheque or bank transfer. The advantage of paying for most transactions through the bank is that this has the effect of producing a parallel set of accounts in the form of the bank statement. Also, it ensures that only authorised people make payments and it reduces the likelihood of theft or fraud. Physical controls Physical controls are additional common sense precautions taken to safeguard the assets of an organisation. They generally fall into the PREVENT action heading. Having a safe Having a safe or a safe place to keep cash, cheques books and legal documents is important for internal control. A proper safe is worth considering especially if your organisation has to keep large sums of money on the premises overnight. Safes are however, expensive and it may be better to improve on banking procedures. 120 Mango 2016

135 Safeguarding fixed assets Fixed assets may represent considerable wealth held in the form of land, buildings, vehicles, machinery and office equipment and, often over-looked, require special attention to ensure their value is maintained and that they do not disappear through lack of vigilance. Measures to safeguard these assets include keeping an Assets Register, writing a vehicle policy and having a maintenance policy for equipment. The assets register An assets register should be set up with an entry or record sheet for each item. Each asset should be tagged with a unique reference number for identification purposes. The register will record important information about each asset, such as: o where and when the item was purchased and how much it cost o where it is held or located o how much it is insured for o repair history o serial numbers o details of guarantees or warranties. o depreciation rate and method, where relevant. The record sheet should also state who is responsible for its maintenance and security. The assets register should be checked by a senior manager or committee member every quarter and any discrepancies reported and appropriate action taken. See Appendix 19 for a sample assets register record sheet. Building and equipment maintenance policy To preserve the value of buildings and equipment, an organisation must have a pro-active policy of maintenance. For buildings this may require a professional planned maintenance contract for which a realistic budget must be provided. Office equipment such as photocopiers and electrical equipment should also receive regular services by qualified technicians to ensure they are safe and operating properly. Mango

136 Insurance cover Valuable assets should be insured to prevent loss to the organisation as a result of every day risks such as fire, theft and natural disasters. The decision whether or not to insure property is a good example of managing risk weighing up the pros and cons of paying for insurance is a common dilemma for managers. Vehicle policy Every organisation that owns vehicles should have a vehicle policy. This will set down the policy on a range of issues such as: o Depreciation o Insurance o Purchasing, replacement and disposal o Maintenance and repair o Private use of vehicles by staff o What to do when accidents happen o Driver qualifications and training o Carrying of passengers. The costs of repair and replacement must be also adequately reflected in the budget process. For each vehicle there should be a log of journeys so that the running costs per KM can be assessed and private use closely monitored. (See Appendix 22 for a sample.) Once you have 12 months information on the costs of running a vehicle, it is possible to calculate its average running costs per kilometre. See Table 6.1 for a worked example. 122 Mango 2016

137 Table 6.1: Calculating vehicle running costs Vehicle make/model: Toyota Van Date purchased: 26 December 2011 Purchase price: $20,000 Depreciation period /method: Maintenance: 5 years, straight line method Service every 6,000 km or every 3 months KM run From 1 January to 31 December 2012: KM on clock on 31/12/12 LESS KM on clock on 01/01/12 Total KM run during year: 20,601 (201) 20, Depreciation $ Purchase Price = $20,000 Depreciation period = 5 years Annual depreciation charge = $20,000 / 5 4, Fuel consumption Total fuel bills for the year 5, Maintenance costs Total of invoices for the year for: repairs, service costs, spare parts, tyres, etc Insurance and tax Insurance, road tax for the year 3,300 TOTAL VEHICLE RUNNING COSTS: 13,700 Cost per KM calculation: Total costs for the year Total no. of KM run = $13,700 20,400 km $0.67 In conclusion, using the information from our accounts and the vehicle log sheet, we can see that each kilometre run with the Toyota Van cost approximately 67 cents. Mango

138 The reconciliation process Reconciliation a DETECT action - involves verifying accounting records to make sure that there are no errors or omissions that have so far gone undetected. Records that should be reconciled at regular intervals are: o Bank (cash) book o Petty cash book o Stock control records o Salaries and deductions schedules. Once the records have been successfully reconciled, the reconciliation statement must be passed on to be independently checked with the source records by a manager (or Board member in a smaller organisation), as discussed below. The process may also highlight follow up actions, eg actions to CORRECT the records. Bank (cash) book The bank (cash) book should be reconciled to the bank statement at least once a month. The purpose of this exercise is to make sure that the organisation s own records agree with the bank s records which are rather like a parallel set of records. This is achieved by taking the closing bank statement balance for a particular date and comparing it to the closing bank book balance for the same date, then explaining the differences. This is an important check not only for accuracy and completeness of records, but also as an early indication of fraud. Petty cash book The petty cash should be counted and reconciled at least weekly. If the imprest system is in use, this is a very easy operation as it is simply a matter of counting up all the payments made since the last reimbursement and counting the cash in the tin. The two totals together make up the total float. If a discrepancy is found, it must be noted in the petty cash book as either an expense unidentified or a surplus unidentified and allocated to an appropriate category. Regular or significant discrepancies must be reported to a manager. 124 Mango 2016

139 Stock records Stock records must be checked against the supplies held in the store and receipts from sales to ensure that no errors have crept in (and no stock has crept out). A sample stock control sheet for some T-shirts is reproduced in Table 6.2. It shows the value of the stock the last time it was reconciled. Then it lists new stock purchases and new sales. This gives us an expected stock value, on paper at least. Note that the table lists both the cost value (ie what the organisation paid the T-shirts supplier) and the resale value (ie what the organisation expects to sell the T-shirts for). However, when the T-shirts in the stock room are physically counted and checked, the actual value is less than expected. (The brackets around the bottom line figures indicate the stock value is short.) What do you think might explain this difference? Table 6.2: Sample stock control sheet Cost value $ Resale value $ Value of stock at 1 Jan 200x 3,000 6,000 Add: Value of purchases between 1 Jan. to 31 Mar ,600 Deduct: Value of sales during the period 1,300 2,600 EXPECTED STOCK VALUE: 2,500 5,000 ACTUAL STOCK VALUE 2,450 4,900 Difference (50) (100) This difference might be caused by one of several things: The value of new purchases could be wrong eg the stock delivered was short. This could happen if a delivery is not properly checked against the delivery note and invoice when received from the supplier. The value of sales could be wrong eg the wrong amount could have been charged or a sale not recorded or coded properly. Mango

140 Stock could have been stolen. Stock could have been given out as gifts or for publicity purposes and not recorded as such in the accounts. Whatever the explanation, the difference has to be investigated and systems reviewed if necessary. This demonstrates well the importance of regular stock checks. Wages book The wages records, and particularly deduction records, are notorious for containing inaccuracies and for abuse in the form of ghost employees (ie people on the payroll who do not exist and where a salary is paid and collected by a fraudster). Wages records must be reconciled every month to ensure that the correct deductions are being made and passed on to the relevant authority, to avoid severe penalties and interest being imposed. Checking accounting records This is another key DETECT responsibility. Managers Managers, for example the Chief Executive, Programme Director and Financial Controller in a larger organisation or Board members in a smaller one, need to regularly check and authorise records to make sure procedures are being followed correctly and transactions are valid. Typically, these checks cover: authorising staff expenses and receipts, to ensure they are valid reviewing bank records and bank reconciliation statements to ensure they are accurate, complete and up to date counting the cash and checking and authorising the cash reconciliation counting stocks and checking inventory records 126 Mango 2016

141 reviewing order books to ensure delegated authority limits are observed, orders are valid and with approved suppliers signing off vehicle log sheets to verify journeys are valid verifying the Assets Register is complete and accurately records the NGO s assets. Any evidence of non-compliance with procedures must be followed up by appropriate CORRECTIVE action, for example training staff, re-writing procedures or even disciplinary action in the case of improper behaviour. Auditors In addition to regular checks by management, every organisation should have an annual audit, a more formal DETECT action. This topic is covered in more detail in the next chapter. Mango

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143 Chapter 7 7 Managing Audit An independent check on accounting records and systems This chapter: Explains what an audit is Describes the different types of audit Provides an overview of the audit report Gives advice on how to prepare for and manage the external audit. What is an audit? An audit is an independent examination of records, procedures and activities of an organisation, resulting in a report on the findings. There are two main types of audit: Internal Audit undertaken for the benefit of those inside the organisation, ie trustees and management. External Audit primarily for the benefit of those outside the organisation, eg stakeholders and funders. Mango

144 Why do NGOs need audits? Audits are important for NGOs as they demonstrate a commitment to transparency and accountability and bring credibility to the NGO. It is also a legal requirement in most countries to have the financial statements reviewed by an independent auditor once a year. The audit should be a positive experience and not one to be feared. Use your auditor to discuss ways of improving your accounting systems and procedures. Internal audit Internal audit involves a structured review of systems and procedures, as set by the Board and managers, to ensure efficient and effective practices. It is not an internal policing function, rather an opportunity to improve systems and build internal capacity. It may be carried out by someone within or outside the organisation. The independent review will include a range of checks, including: financial accounting systems and procedures management accounting systems and procedures internal control mechanisms. The Three E s influence an internal auditor s approach: Economy: paying no more than necessary for the resources needed. Efficiency: getting the greatest benefit with the fewest resources. Effectiveness: how successful we are at meeting objectives or doing the right thing. The internal auditor s report will highlight their findings to the governing body and management and make recommendations for action, where needed. This could include a more detailed investigation, changing a procedure or training a staff member. 130 Mango 2016

145 External audit An external audit is an independent examination of the financial statements prepared by the organisation. It is usually conducted for statutory purposes (because the law requires it). External auditors may also be engaged to do other specific assignments, (eg a fraud investigation). Being independent means... The auditor must not have been involved in keeping the accounting records and is not personally connected in any way with the organisation being audited. Although an auditor s independence must be respected and observed at all times, they are nonetheless providing a service for a fee you have a right to expect value for money. Purpose The purpose of external audit is to verify that the annual accounts provide a true and fair picture of the organisation s finances, and that the use of funds is in accordance with the aims and objects as outlined in the constitution. The purpose of an external audit is NOT: o To act as a fraud investigation o To prepare the accounts o To provide a certificate to say there are no problems o Proof that internal control systems are effective o Evidence that accounts are 100% error free. Although it is not the prime role of the audit to detect fraud, this may of course come to light during the checks that take place. Auditors have thus been described as watchdogs not bloodhounds. Appointment An external audit can be conducted either as part of the annual review of accounts or as a special review by a donor agency. It is conducted by a firm of accountants with recognised professional qualifications. Mango

146 Auditors are appointed by the Board of Trustees (or Annual General Meeting) or by a donor for a special audit. They are independent of the organisation employing them. What is involved? Auditors only have a limited time in which to complete their work, so they concentrate on testing the validity of a sample of transactions and results rather than vigorously checking everything. Auditor-speak de-mystified: Material: An item is said to be material if it is considered to be significant to the users of the financial statements. Test basis: A representative sample, the rest of the transactions are assumed to be similar to the sample tested Figure 7.1: Sampling Sampling involves checking a selection of records, for example: a range of high value goods (represented by the slice in the diagram in Figure 7.1) or one month s worth of transactions (the box in the diagram) or a random set if transactions (the X marks in the diagram). 132 Mango 2016

147 Note that if there are errors or fraudulent transactions (as represented by the black dots in the diagram), due to the sampling process, the auditor does not guarantee to detect these. The audit report An external audit results in a report addressed to members, usually presented and approved at the annual general meeting. The report gives an audit opinion on the state of affairs of the organisation and operations for the period. If you have an opportunity to review your own or a partner s financial statement, it is worth looking closely at the auditor opinion to see what it says. Everyone hopes for a clean audit report that is where the auditor confirms that the financial statements fairly represent or give a true and fair view of the organisation s financial statements. Auditor-speak de-mystified: True means that the transaction did take place and that an asset exists. Fair means that a transaction is fairly valued and that assets and liabilities are fairly stated. Modified audit opinions The auditors do not always agree with the financial results presented by the organisation. This could result in the auditor issuing what is known as a qualified or modified opinion. There are two reasons why an auditor would consider giving a modified audit opinion: they conclude that the financial statements as a whole have significant inaccuracies they have not been able to find enough evidence to conclude that the financial statements as a whole are free from significant errors. Mango

148 Table 7.1: External auditor opinions Auditor opinion What it says and means "The financial statements present fairly, in all material respects... (or show a true and fair view of...)" Unqualified opinion Unmodified opinion. A 'clean' audit report. "The financial statements present fairly, in all material respects... (or show a true and fair view of...)" Unqualified opinion: with emphasis of matter Unmodified opinion. Still a clean audit opinion but followed by a note on something that the reader needs to be aware of, eg an outstanding legal action or a major catastrophe. "Except for the matters described above... the financial statements present fairly (or give a true and fair view of)..." Qualified opinion: subject to or except for Modified opinion. The accounts are basically OK, apart from specific identified issues described, eg an incorrect accounting policy, or specific unsupported expenditure....the financial statements do not present fairly (or give a true and fair view of)..." Adverse opinion Modified opinion. There so many significant errors that the accounts do not give a true and fair view. This is serious. "...because of the significance of the matter described above... we do not express an opinion on the financial statements." Disclaimer of opinion Modified opinion. The auditors are unable or unwilling to give an opinion because the records are so poor or incomplete. This is very bad indeed. 134 Mango 2016

149 There are various degrees of modified opinion, depending on the seriousness of the disagreement or concern with the financial statements and records, as summarised in Table 7.1. Where a modified opinion is given, the auditor must explain their reasons in a 'Basis for Modification Paragraph' in the audit report. This paragraph is normally placed before the opinion paragraph and details the significant issues and errors they found during the audit. If the auditors propose any adjustments or changes to the draft financial statements, these must also be approved by the Board. Management letter Auditors often provide a Management Letter after the audit is completed. This is separate to the audit report and is addressed to management. The report highlights weaknesses identified in the internal control systems and makes recommendations for improvements. Managers have an opportunity to respond to the findings outlined in the management letter and explain what action they will take. Donor (or project) audit On occasion, donor agencies may request an independent external audit of records and activities and will appoint a qualified person to undertake a review. The primary purpose of such a review is to check that grants are being used as intended and in accordance with the budget in the original funding agreement. The auditor may wish to interview staff and committee members and even request to observe the organisation in pursuance of its activities. Every cooperation should be given during such visits and an effort made to be open and honest about organisational strengths and weaknesses. Mango

150 What does the auditor need? An auditor will need a quiet place to work where the checks can take place without interruption. If individual staff members are to be interviewed, then a private room where confidential discussions can take place will also be required. Depending on the type of audit taking place, the auditor will usually give advance notification of the records needed. Do make sure that all the records are up-to-date and properly filed as this will facilitate the routine checks and cause minimal disruption for the organisation. This will also help to save on audit fees. Here is a checklist of records and other documentation which might be requested by the auditor: Table 7.2: An auditor s checklist Group of Records A. Primary records of account: B. Summaries and reconciliation statements: Description of item Cashbooks completely up to date to the year-end File of invoices/vouchers for all items of expenditure File or book of receipts for money received Bank statements, paying in slips and cheque books Wages book and records General ledger, if kept A Trial Balance and/or a summary of all receipts and payments by budget category Bank reconciliation statements for all bank accounts at the year-end cut-off date Petty cash reconciliation statement to the year-end cut-off date Stock sheets C. Schedules: Schedule of Creditors (money owed by the organisation) Schedule of Debtors (money owing to the organisation) Schedule of Grants Due Schedule of Grants Received in Advance Fixed Assets Register 136 Mango 2016

151 Group of Records Description of item D. Other information: A letter from bankers to confirm balances [this will be requested by the auditors themselves] Constitution of the organisation List of Committee members and staff Minutes of Board and management meetings Donor agencies funding agreements and audit requirements Summary Table 7.3: Different types of NGO audit Area: Internal External Donor/Project Main purpose Focus of review (starting point) Appointed by Scope Check effectiveness of systems & procedures Systems and Procedures manual Management (but have direct line to the Board) As per planned schedule based on risk assessment. May be for a specific department, grant or period. Report includes Findings and recommendations for improvements Employed by Qualifications The NGO or external body (outsourced) No formal requirement Verify the published accounts give a true & fair view Financial statements & underlying records Board (or members) All financial transactions in the accounts, whole organisation Auditor s opinion and Management letter External body Must be qualified & registered accountant Check that funds used in accordance with the funding agreement. Grant agreement Donor, but may use normal external auditor if on approved list Usually limited to the project and related grant funding. Usually, auditor s opinion(s) and recommendations External body (sometimes donor themselves) Usually qualified & registered accountant Mango

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153 Chapter 8 8 Fraud and Corrupt Practices How to manage when things go wrong This chapter: Defines fraud and its impact Explains how to detect and deal with fraud Describes corruption and how it manifests itself Looks at the risks of bribery on NGOs Discusses how to implement a zero tolerance approach to bribery. What is fraud? There will be occasions when internal control systems fail to prevent losses through theft, fraud or other irregularities. Fraud includes theft of goods or property, falsifying expenses claims and falsification (or destruction) of records to conceal an improper action. Fraud is Intentionally lying or cheating to gain an advantage or to cause someone else to make a loss Mango

154 Fraud does not include: accounting errors actions condoned by established practice cases where no loss is incurred. Other irregularities include unauthorised activities for private gain: eg borrowing from petty cash, use of vehicles or abuse of telephones and other equipment for private business. Although these activities are less serious than fraud they must still be taken seriously as they represent abuse of NGO resources. Fraud has a damaging effect on the organisation with wide-ranging consequences if not properly managed. Imagine a stone falling into a pond: the initial splash is the loss of funds or equipment but it does not stop there, as Figure 8.1 illustrates. Figure 8.1: The ripple effect of fraud 140 Mango 2016

155 Top tips on the warning signs of fraud Remember: Prevention is better than cure! The following ideas may be an early indication of fraud or abuse. Use them with care! From the accounting records: Lots of corrections to the manual cashbook this may include extensive use of white-out or blocked out figures Pristine records ie a manual cashbook that looks as if they have all been written on the same day in the same hand. Could be an indication of rewritten/duplicate books Delayed banking of cash received shown up by bank reconciliation. Could be unauthorised borrowing of cash. Records not being kept up to date ie deliberately delayed so managers cannot detect false accounting going on. Missing supporting documents eg certain bank statements destroyed to cover someone s tracks, or a project officer who regularly claims to have lost receipts. Debtors rising unexpectedly eg if debtors have paid but the cash is being pocketed. This may occur if there are poor controls in issuing receipt books as someone could take an unused book and issue valid receipts without them ever being entered into the accounting records. Hand written supporting documents with errors and corrections on them. Indicates possible changes made after the goods or services were purchased. Cash counts not reconciling to the accounts but reconciling at the next cash count possible borrowing of funds by the safe key holder. Mango

156 Reports: Budget monitoring reports showing inconsistent behaviour between line items - eg project-related expenditure is under-spent due to delays except for fuel which is over-spent. This could indicate abuse of the vehicle. Vehicle log books not maintained in an appropriate level of detail. This could indicate abuse of the vehicle. Budget monitoring reports delayed to cover up something? Non-financial areas: Working very long hours first in last out of the office? Could mean that they have to work more to cover their tracks? Never taking holidays can t afford for someone else to see what they are doing! Change of lifestyle or spending patterns don t match their income (eg designer clothes, social habits, expensive car...) Creating smoke screens where someone is making a false accusation about another team member to give them time to cover their tracks or make a getaway! And some Ideas on fraud prevention: Make sure you have robust internal control systems in place. Visit projects, and see if the activities carried out roughly match the expenditure. Share financial reports with beneficiaries, and ask if they think they have had value for money. Hold regular meetings with other staff at all levels (eg project and administrative staff, Board members, etc) to discuss financial reports, making budgets and reports openly available. Help non-finance staff and managers improve their financial skills, for instance by reading Mango's Guide to Financial Management (available on the CD-Rom in your training pack.) 142 Mango 2016

157 How to deal with fraud Incidents of fraud and other irregularities require sensitive handling to minimise the long-term impact. It is important to be prepared to deal with any occurrences of fraud or financial irregularity by having a written procedure which covers steps that need to be taken. Deterrence The procedure should state clearly that routine controls, checks and balances are in place to safeguard the assets of the organisation. The controls also protect staff from any suspicion of, or temptation to, fraud or other impropriety. Paid staff and volunteers are therefore obliged to cooperate fully with internal control procedures and failure to do so will be dealt with as appropriate within the organisation s disciplinary code. Types of irregularity The procedure will identify different types of irregularity, how seriously they are viewed, and how they will be dealt with. For example, all instances of theft and fraud will be viewed as Gross Misconduct and result in immediate dismissal and loss of terminal benefits. It should include a clear statement on the circumstances in which the Police will be informed. This must take in to account local circumstances and cultural practice. Detection A procedure for reporting suspicions of irregularities should be made clear to all. This should make it easy for people to report concerns in confidence and without fear of retribution. When an irregularity is reported or detected, record the details in writing and report it immediately to a manager. Follow up all reports or suspicions immediately, do not allow rumours to spread or let the trail go cold. Investigation When an incident is reported, it must be dealt with quickly and sensitively. Look for corroboratory evidence before instigating a formal investigation. If all the evidence points to an irregularity, the individual(s) involved should be formally interviewed with a third person present to take notes. Mango

158 Protect documents and records by either removing access to them by those involved in the irregularity or by suspending the people involved during the investigation. Depending on the nature of the irregularity, an investigation could be conducted by a senior manager or Board member, the internal auditor, the external auditor or, in more serious cases, the Police. The aftermath Don t under-estimate the long-term and less tangible impacts of fraud. It will involve a lot of a managers time during the investigation and afterwards. In particular: People will be distressed by the experience and need to be supported. Colleagues will suffer all the mixed emotions of bereavement: anger, guilt, disappointment and loss. They may worry that their jobs are under threat. New staff may need to be recruited and trained. The media may get hold of the story and ask for information Donors will need reassuring that their resources are safe and the project will not suffer. Summary Keep RISKS LOW in mind when managing a fraud or similar incident: DO Report the incident to a superior or Board member Investigate incidences, gather the facts Secure the assets and records Keep calm! DON T Swiftly act Look the other way Overlook the fall out of a fraud Withhold information to protect others Above all, remember that prevention is better than cure! 144 Mango 2016

159 What is corruption? Corruption happens in all countries of the world and affects all levels in society. But its affects are most severely experienced in the developing world and by the poorest in society ie the communities that NGOs work with most often. Corruption is the misuse of entrusted power for private gain. Transparency International More than $1 trillion is paid globally in bribes each year. That means $1 out of every $30 of GDP is being paid in bribes (World Bank Institute 2004). It is estimated (by The Economist 2010) that as much as 25% of Africa s GDP is cost of corruption in Africa. Bribery is estimated to raise the average Kenyan family s annual cost of living by 15%. (Transparency International 2011). Corruption debases democracy, undermines the rule of law, distorts markets, stifles economic growth, and denies many their rightful share of economic resources or lifesaving aid. Kofi-Annan, former General Secretary of the UN Corruption appears in many different forms including bribery, fraud, sexual exploitation, cronyism and money laundering. See Table 8.1 for definitions of typical corrupt practices. Mango

160 Table 8.1: Key definitions Bribery Collusion Corruption Cronyism Embezzlement Extortion Facilitation payments Fraud The offering, promising, giving, accepting or soliciting of an advantage as an inducement for an action which is illegal, unethical or a breach of trust. Inducements can take the form of gifts, loans, fees, rewards or other advantages. An agreement, usually secretive, which occurs between two or more people to limit open competition by deceiving, misleading or defrauding others. It can involve price-fixing, illicit payments to influence purchasers or misrepresenting the independence of the relationship between the colluding parties (eg resulting from nepotism and cronyism). The misuse of entrusted power for private gain, which can be both personal gain and gain or advantage to a company or organisation. The appointment of friends and associates to positions of authority, without proper regard to their qualifications. Fraudulently acquiring funds or property entrusted to your care but actually owned by someone else. The practice of obtaining something, especially money or property, through force or threats. A form of bribery made with the purpose of expediting or facilitating the performance by a public official of a routine governmental action and not to obtain or retain business or any other undue advantage. Typically demanded by low level, low income officials in exchange for providing services to which one is legally entitled without such payments. Wrongful or criminal deception intended to result in financial or personal gain. Money laundering A process whereby the identity and origin of illegally obtained money, such as bribes, are concealed or disguised. The objective is to make illegally obtained money to appear as if it comes from a legitimate source. Nepotism Sexual exploitation The practice among those with power or influence of favouring relatives or friends, especially by giving them jobs. Where someone uses their position to gain sexual favours. 146 Mango 2016

161 Bribery and the NGO sector Bribery is the most common form of corruption affecting poorer communities. Bribery is The offering, promising, giving, accepting or soliciting of an advantage as an inducement for an action which is illegal, unethical or a breach of trust. NGOs are at particular risk of paying bribes due to the nature of their work. Key risk factors for NGOs: The countries NGOs operate in have high rates of corruption. NGO work involves frequent contact with public officials, eg for licenses, crossing borders. NGOs have regular relationships and often work in partnership with government agencies. The humanitarian nature of NGO work means they need to get things done quickly. NGOs, unlike companies, do not base decisions on where to operate according to the levels of corruption. NGO structures involve working with local partners and Third Party agents. NGO operations are decentralised and field staff make local decisions. In many countries it is illegal to receive and pay a bribe. This is an important risk factor for NGOs and their staff to consider. But NGOs must also recognise that bribery is unethical and they have a moral obligation to fight bribes in their work. Paying bribes embeds and sustains corruption. Mango

162 Bribery is not victimless: it affects all communities but affects the poor most. Bribery is always a two-way transaction there is a payer and the receiver therefore, if we cut off the flow of bribes, bribery cannot happen. This is the basis for the argument for a zero tolerance approach to bribes. Zero tolerance approach to bribes Mango supports a zero-tolerance approach to bribery. We recommend all NGOs create an anti-bribery policy and train their staff to use it. The anti-bribery principles put forward by Bond and a group of international NGOs in 2010 provide a strong framework for an anti-bribery policy and action plan. (See Anti Bribery Principles and Guidance for NGOs at ). The Seven Principles focus on internal policies and practice, plus the principle of collective NGO action: Figure 8.2: Seven principles for zero tolerance High level commitment Monitoring and evaluation Internal policies Risk assessment + Collective action Dissemination and communication Robust antibribery procedures Due diligence on partners & agents 148 Mango 2016

163 Seven anti-bribery principles for NGOs 1. High-level commitment The Board of Trustees and senior management should commit to and oversee the implementation of a policy of zero-tolerance, recognising that bribery is contrary to fundamental values of integrity, transparency and accountability and undermines organisational effectiveness. 2. Risk assessment Bribery risk assessment should form part of each organisation s overall and ongoing risk management process. 3. Devise and implement robust anti-bribery procedures Organisations should devise, implement and maintain robust procedures, which are proportionate to the risks and to the size, resources and complexity of the organisation. 4. Due-diligence assessment of partners, agents and contractors The organisation should assess the bribery risk associated with entering into partnership or contracting arrangements with other entities and then carry out periodic due diligence based on that risk assessment. Partnership or contractual arrangements should check that these organisations have policies and procedures which are consistent with these Principles and Guidance. 5. Dissemination and communication The organisation should establish effective internal and external communication of its policy and procedures. The organisation should undertake training and awareness programmes to ensure staff, agents and partners are aware of the potential risks, how bribery might affect them, what they should do if they are offered a bribe, and the consequences should they be found to have made or received a bribe. 6. Monitoring and evaluation Implementation of anti-bribery procedures should be monitored as part of overall risk management and internal control processes. Periodic reviews of anti-bribery procedures should be made and reported as part of governance and accountability processes. Organisations that are exposed to higher risks should consider external verification and assurance of their anti-bribery procedures. 7. Collective action The organisation should commit to sharing information and strengthening collective action to prevent bribery. Mango

164 To implement the zero tolerance approach, there are five key tactics to follow: Figure 8.3: Five tactics for anti-bribery action Assess risk The first stage of developing a zero-tolerance to bribery is to identify where your NGO is at risk of encountering bribes: Identify the key risk areas linked to your operations, eg working with partners, procurement, recruitment etc. Identify what the bribery risk is likely to be, eg facilitation payments, jobs for favours Assess the frequency of the bribery risk Assess the consequence if the bribe is not paid, eg delays to projects. With this information, you can then prioritise action to reduce the risk of bribes now and in the future. There are many techniques to capture and measure risk and your organisation may already have a preferred approach. Table 8.2 illustrates an example template. 150 Mango 2016